On the international dimension of fiscal policy
By: Gianluca Benigno and Bianca De Paoli.
Contributors: De Paoli, Bianca.; London School of Economics and Political Science. Centre for Economic Performance.
Series: CEP discussion paper -- no. 905
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2009
Place of publication: London
Language: eng
Format: Electronic resource
Description: This paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non-state-contingent debt. The main finding of the paper is that, once the open economy aspect of the policy problem is considered, it is not optimal to smooth taxes following idiosyncratic shocks. Even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium, the presence of a terms of trade externality lead to movements in the tax rate. Also in contrast with the closed economy, the introduction of sticky prices can reduce the optimal volatility of taxes.
Notes: Title from PDF file (viewed on Jan. 23, 2009).

"January 2009."

Includes bibliographical references.

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