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Fiscal Consolidation in an Open Economy

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  • Erceg, Christopher
  • Lindé, Jesper

Abstract

This paper uses a New Keynesian DSGE model of a small open economy to compare how the effects of fiscal consolidation differ depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important differences in the impact of fiscal shocks across these monetary regimes that depend both on the duration of the zero lower bound and on features that determine the responsiveness of inflation.

Suggested Citation

  • Erceg, Christopher & Lindé, Jesper, 2012. "Fiscal Consolidation in an Open Economy," CEPR Discussion Papers 8955, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8955
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    References listed on IDEAS

    as
    1. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
    2. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May.
    3. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    currency union; fiscal policy; monetary policy; New Keynesian Small Open Economy DSGE Model; zero lower bound constraint;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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