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Optimal Government Spending Reversal in a Small Open Economy

Author

Listed:
  • Shigeto Kitano

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

  • Kenya Takaku

    (Graduate School of Economics, Nagoya University, Japan)

Abstract

This paper reexamines optimal debt stabilization policy in a small open economy borrowing from abroad. We incorporate spending reversals as a policy option available to policy-makers for stabilizing public debt. Results show that spending reversals can be welfare-improving and that there exists an optimal degree of spending reversal if the debt elasticity of the country-specific risk premium is high. The tradeoff between smoothing the tax rate and stabilizing the sovereign interest rate in the discussion of optimal tax rate policy (Bi, 2010) does not arise. Spending reversals can lower both the tax rate volatility and that of the interest rate.

Suggested Citation

  • Shigeto Kitano & Kenya Takaku, 2011. "Optimal Government Spending Reversal in a Small Open Economy," Discussion Paper Series DP2011-26, Research Institute for Economics & Business Administration, Kobe University, revised Oct 2012.
  • Handle: RePEc:kob:dpaper:dp2011-26
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    File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2011-26.pdf
    File Function: Revised version, 2012
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    More about this item

    Keywords

    Sovereign debt; Debt stabilization; Welfare; Spending reversals; Small open economy;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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