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On the International Dimension of Fiscal Policy

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  • Benigno, Gianluca
  • De Paoli, Bianca

Abstract

This paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non-state-contingent debt. The main finding of the paper is that, once the open economy aspect of the policy problem is considered, it is not optimal to smooth taxes following idiosyncratic shocks. Even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium, the presence of a terms of trade externality lead to movements in the tax rate. Also in contrast with the closed economy, the introduction of sticky prices, can reduce the optimal volatility of taxes.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7232.

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Date of creation: Mar 2009
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Handle: RePEc:cpr:ceprdp:7232

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Keywords: fiscal policy; optimal policy; small open economy;

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  1. Beetsma, Roel & Jensen, Henrik, 2002. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Working Paper Series 0166, European Central Bank.
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Citations

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Cited by:
  1. Simon Wren-Lewis & Fabian Eser, 2009. "When is Monetary Policy All we Need?," Economics Series Working Papers 430, University of Oxford, Department of Economics.
  2. Chan Wang & Heng-fu Zou, 2012. "On the efficiency of monetary and fiscal policy in open economies," CEMA Working Papers 534, China Economics and Management Academy, Central University of Finance and Economics.
  3. Stéphane Auray & Beatriz De Blaz & Aurélien Eyquem, 2011. "Ramsey Policies in a Small Open Economy with Sticky Prices and Capital," Post-Print halshs-00581173, HAL.
  4. Stéphane Auray & Aurélien Eyquem & Paul Gomme, 2012. "A Tale of Tax Policies in Open Economies," Working Papers 2012-32, Centre de Recherche en Economie et Statistique.
  5. Di Giorgio, Giorgio & Nisticò, Salvatore, 2013. "Productivity shocks, stabilization policies and the dynamics of net foreign assets," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 210-230.
  6. Gianluca Benigno & Pierpaolo Benigno & Salvatore Nisticò, 2011. "Risk, Monetary Policy and the Exchange Rate," NBER Working Papers 17133, National Bureau of Economic Research, Inc.
  7. Jonathan Hoddenbagh & Mikhail Dmitriev, 2013. "The Optimal Design of a Fiscal Union," 2013 Papers pho497, Job Market Papers.

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