Recent Economic Developments and the Implications for Fiscal Policy in Open Economy Macroeconomics

The paper provides a discussion of the most recent developments in the open economy macroeconomics literature on fiscal policy which has grown rapidly in recent years. This growth is stimulated by three recent economic trends which are likely to influence the efficiency and the management of fiscal policy. First, the increasing integration in international financial and goods markets led researchers to reconsider its impact on the effects of fiscal policy by relaxing the purchasing power and the interest rate parity assumptions which are retained in the early open-economy general equilibrium models. Second, the public debt crisis seen in most of the developed countries led to the analysis of a fiscal policy based on a better management of government expenditures and to the specification of a debt-financed fiscal policy that internalizes the necessity of a sustainable deficit. Third, the creation of European monetary union and the recent global economic crisis raised interest on the gains from fiscal stabilization as well as cooperation and stimulated research on the optimal combination of dynamic fiscal and monetary policies.