External Debt and Stabilizing Macroeconomic Policies
Author(s)
Alessandro Piergallini
ABSTRACT
This paper investigates the dynamic effects of fiscal and monetary feedback policy rules in a small open economy with flexible exchange rates and risk premia on external debt. It is shown that equilibrium uniqueness and stability occur under locally Ricardian fiscal policies regardless of the degree of reaction of nominal interest rates to inflation, in contrast with closed-economy environments. Fiscal revaluation mechanisms of the type predicted by the fiscal theory of the price level are precluded by international parity conditions. As a result, locally non-Ricardian fiscal policies are destabilizing even under an accommodating monetary policy stance.
This paper investigates the dynamic effects of fiscal and monetary feedback policy rules in a small open economy with flexible exchange rates and risk premia on external debt. It is shown that equilibrium uniqueness and stability occur under locally Ricardian fiscal policies regardless of the degree of reaction of nominal interest rates to inflation, in contrast with closed-economy environments. Fiscal revaluation mechanisms of the type predicted by the fiscal theory of the price level are precluded by international parity conditions. As a result, locally non-Ricardian fiscal policies are destabilizing even under an accommodating monetary policy stance.
Cite this paper
Piergallini, A. (2015) External Debt and Stabilizing Macroeconomic Policies. Theoretical Economics Letters, 5, 720-724. doi: 10.4236/tel.2015.56083.
Piergallini, A. (2015) External Debt and Stabilizing Macroeconomic Policies. Theoretical Economics Letters, 5, 720-724. doi: 10.4236/tel.2015.56083.
References
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[1] Leeper, E.M. (1991) Equilibria under “Active” and “Passive” Monetary and Fiscal Policies. Journal of Monetary Economics, 27, 129-147. http://dx.doi.org/10.1016/0304-3932(91)90007-B [2] Woodford, M. (2003) Interest and Prices. Princeton University Press, Princeton and Oxford. [3] Canzoneri, M.B., Cumby, R. and Diba, B. (2011) The Interaction between Monetary and Fiscal Policy. In: Friedman, B. and Woodford, M., Eds., Handbook of Monetary Economics, North-Holland/Elsevier, Amsterdam and Boston, 935-999. [4] Montiel, P.J. (2011) Macroeconomics in Emerging Markets. 2nd Edition, Cambridge University Press, New York. http://dx.doi.org/10.1017/CBO9780511977497 [5] Leeper, E.M. and Yun, T. (2006) Monetary-Fiscal Policy Interactions and the Price Level: Background and Beyond. International Tax and Public Finance, 13, 373-409. http://dx.doi.org/10.1007/s10797-006-8599-2 [6] Benhabib, J., Schmitt-Grohé, S. and Uribe, M. (2001) Monetary Policy and Multiple Equilibria. American Economic Review, 91, 167-186. http://dx.doi.org/10.1257/aer.91.1.167 [7] Bardhan, P.K. (1967) Optimum Foreign Borrowing. In: Shell, K., Ed., Essays on the Theory of Optimal Economic Growth, The MIT Press, Cambridge, 117-128. [8] Obstfeld, M. (1982) Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect? Quarterly Journal of Economics, 97, 251-270. http://dx.doi.org/10.2307/1880757 [9] Bhandari, J.S., Haque, N.U. and Turnovsky, S.J. (1990) Growth, External Debt, and Sovereign Risk in a Small Open Economy. IMF Staff Papers, 37, 388-417. http://dx.doi.org/10.2307/3867295 [10] Turnovsky, S.J. (1997) International Macroeconomic Dynamics. The MIT Press, Cambridge. [11] Taylor, J.B. (1993) Discretion versus Policy Rules in Practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195-214. http://dx.doi.org/10.1016/0167-2231(93)90009-L