Efficient expropriation: Sustainable fiscal policy in a small open economy
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Efficient Expropriation: Sustainable Fiscal Policy in a Small Open Economy
We study a small open economy characterized by two empirically important 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 amplify and prolong shocks to output. In particular, even when the government is completely benevolent, the government’s credibility not to expropriate cap...
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