Efficient Expropriation: Sustainable Fiscal Policy in a Small Open Economy

43 Pages Posted: 14 Jul 2006

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Manuel Amador

affiliation not provided to SSRN

Gita Gopinath

International Monetary Fund (IMF); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 17, 2006

Abstract

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 capital varies endogenously with the state of the economy and may be scarcest during recessions. This increased threat of expropriation depresses investment, prolonging downturns. It is the incompleteness of financial markets and the lack of commitment that generate investment cycles even in an environment where first-best capital stock is constant.

JEL Classification: C91, C93, D01, D64

Suggested Citation

Aguiar, Mark and Amador, Manuel and Gopinath, Gita, Efficient Expropriation: Sustainable Fiscal Policy in a Small Open Economy (April 17, 2006). FRB of Boston Working Paper No. 06-9, Available at SSRN: https://ssrn.com/abstract=917192 or http://dx.doi.org/10.2139/ssrn.917192

Mark Aguiar (Contact Author)

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Manuel Amador

affiliation not provided to SSRN

Gita Gopinath

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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