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Optimum government credibility in an open-economy fiscal expansion


  • Daniel Ryan


A real open-economy model is constructed in which the government's commitment to a future fiscal expansion is not credible. Government credibility (measured by the growth rate of the probability that the expansion will occur) becomes a parameter of the system and appears directly in the eigenvalues. Simulations are performed demonstrating the effect of credibility on GNP, the exchange rate, and other variables. Lastly, the optimum credibility is determined which minimizes a loss function associated with deviations from full employment. Copyright International Atlantic Economic Society 1998

Suggested Citation

  • Daniel Ryan, 1998. "Optimum government credibility in an open-economy fiscal expansion," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 4(4), pages 305-317, November.
  • Handle: RePEc:kap:iaecre:v:4:y:1998:i:4:p:305-317:10.1007/bf02295684
    DOI: 10.1007/BF02295684

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    References listed on IDEAS

    1. Levin, Jay H., 1986. "Trade flow lags, monetary and fiscal policy, and exchange-rate overshooting," Journal of International Money and Finance, Elsevier, vol. 5(4), pages 485-495, December.
    2. Walsh, Carl E., 1993. "Central bank strategies, credibility, and independence : A review essay," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 287-302, November.
    3. Guillermo A. Calvo & Enrique G. Mendoza, 1994. "Trade Reforms of Uncertain Duration and Real Uncertainty: A First Approximation," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 555-586, December.
    4. Isaac, Alan G, 1995. "Monetary Policy, Elasticity Dynamics, and Real Exchange Rate Reversal," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 335-349, May.
    5. Kawai, Masahiro & Maccini, Louis J, 1995. "Twin Deficits versus Unpleasant Fiscal Arithmetic in a Small Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 639-658, August.
    6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    7. Stilianos Fountas, 1994. "Interactions among Private Investors and Government Policies: Rules versus Discretion," Journal of Economic Studies, Emerald Group Publishing, vol. 21(2), pages 38-56, May.
    8. Ioannis Halikias, 1994. "Testing the Credibility of Belgium's Exchange Rate Policy," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 350-366, June.
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