Time Consistency of Optimal Monetary and Fiscal Policy in a Small Open Economy
East Carolina University - Department of Economics
April 19, 2013
Journal of International Money and Finance, Volume 36, September 2013, Pages 47–67
This paper characterizes conditions under which optimal monetary and fiscal policy is time consistent in a stylized small open economy with a flexible foreign exchange rate regime. It shows that these conditions depend on the way in which leisure is assumed to enter preferences and/or on the process which productivity is assumed to follow. This paper further argues that these conditions may fail to be sufficient if the small open economy implements a fixed foreign exchange rate regime. Thus, a credible fixed exchange rate regime does not necessarily help render optimal policy time consistent.
Keywords: Time consistency, Optimal monetary and fiscal policy, Small open economy
JEL Classification: E52, E61, E62working papers series
Date posted: April 4, 2012 ; Last revised: May 6, 2013
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