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Quadrilemma Not Trilemma: Fiscal Policy Matters

CAEPR Working Paper #2016-003

30 Pages Posted: 27 Aug 2016  

Hao Jin

Wang Yanan Institute for Studies in Economics (WISE) and School of Economics, Xiamen University

Date Written: August 26, 2016

Abstract

This paper examines the interactions between fiscal policy and the open economy macroeconomic policy trilemma in a small open economy dynamic stochastic general equilibrium model. I show that the trilemma policy regime choices require fiscal accommodation. Otherwise, when future budget surpluses fail to stabilize government liabilities, fiscal imbalance generates exchange rate depreciation, regardless of monetary and capital account policy regimes. In this active fiscal policy regime, fiscal and monetary policy interact to determine the magnitude of exchange rate depreciation, while monetary policy and capital controls manage the timing of the depreciation.

Keywords: Trilemma, Fiscal Policy, Capital Account Policy, Exchange Rate Stability, Monetary Policy

JEL Classification: E62, F33, F38, F41

Suggested Citation

Jin, Hao, Quadrilemma Not Trilemma: Fiscal Policy Matters (August 26, 2016). CAEPR Working Paper #2016-003. Available at SSRN: https://ssrn.com/abstract=2830509 or http://dx.doi.org/10.2139/ssrn.2830509

Hao Jin (Contact Author)

Wang Yanan Institute for Studies in Economics (WISE) and School of Economics, Xiamen University ( email )

Economics Building D215
Xiamen University
Xiamen, Fujian 361005
China
86-592-2180353 (Phone)
86-592-2187708 (Fax)

HOME PAGE: http://haojin.weebly.com/

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