Fiscal Consolidation in an Open Economy

21 Pages Posted: 22 May 2012

See all articles by Jesper Lindé

Jesper Lindé

Sveriges Riksbank - Research Division

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: May 2, 2012

Abstract

This paper uses a New Keynesian DSGE model of a small open economy to compare how the effects of fiscal consolidation differ depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important differences in the impact of fiscal shocks across these monetary regimes that depend both on the duration of the zero lower bound and on features that determine the responsiveness of inflation.

Keywords: Monetary policy, currency union, fiscal policy, zero lower bound constraint, new Keynesian small open economy DSGE model

JEL Classification: E52, E58

Suggested Citation

Linde, Jesper and Erceg, Christopher J., Fiscal Consolidation in an Open Economy (May 2, 2012). FRB International Finance Discussion Paper No. 1046, Available at SSRN: https://ssrn.com/abstract=2063812 or http://dx.doi.org/10.2139/ssrn.2063812

Jesper Linde (Contact Author)

Sveriges Riksbank - Research Division ( email )

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HOME PAGE: http://www.riksbank.com

Christopher J. Erceg

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2575 (Phone)
202-736-5638 (Fax)

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