Fiscal Policy in a Tractable Liquidity‐Constrained Economy

Fiscal Policy in a Depressed Economy

This paper examines logic and evidence bearing on the efficacy of fiscal policy in severely depressed economies. In normal times central banks offset the effects of fiscal policy. This keeps the policy-relevant multiplier near zero. It leaves no space for expansionary fiscal policy as a stabilization policy tool. But when interest rates are constrained by the zero nominal lower bound, discretio...

Fiscal Policy Reforms in a Global Economy

The paper considers two countries each populated by workers and capitalists and equipped with a government that collects taxes to nance productive expenditure and income redistribution. The share of income redistributed de nes the size of the welfare state. Both groups in each country bene t from an abolition of the welfare state in the long run. Nevertheless, the optimal scal policy in autarky...

The political economy of fiscal policy: Survey

Optimal Fiscal Policy and Amplification in a Small Open Economy∗

We study optimal fiscal policy in a small open economy characterized by two main frictions – incomplete financial markets and an inability of the government to commit to policy. Our main contribution is to show that in this environment, the best sustainable policy can amplify and prolong shocks to output. In particular, the government’s credibility not to expropriate foreign capital endogenousl...

Sustainable Fiscal Policy in a Small Open Economy

We study a small open economy characterized by two main frictions – incomplete financial markets and an inability of the government to commit to policy. We characterize the best sustainable fiscal policy and show that it can prolong shocks to output. In particular, the government’s credibility not to expropriate capital endogenously varies with the state of the economy and may be “scarcest” dur...