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An optimal government spending reversal rule in a small open economy

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  • Kitano, Shigeto
  • Takaku, Kenya

Abstract

This paper presents a reexamination of debt stabilization policy in a small open economy borrowing from abroad. Spending reversals are incorporated as a policy option available to policy-makers for stabilizing public debt. Results show that a spending reversal rule can be welfare-improving and that there exists an optimal degree of spending reversal. An optimal spending reversal rule can lower both the tax rate volatility and interest rate volatility compared with the case without the reversal rule. Results also suggest that, as friction in foreign borrowing becomes greater (because of a higher country-specific interest rate premium), the welfare benefit of the reversal rule will be increasingly important.

Suggested Citation

  • Kitano, Shigeto & Takaku, Kenya, 2013. "An optimal government spending reversal rule in a small open economy," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 374-382.
    • Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:374-382
    DOI: 10.1016/j.iref.2012.11.003
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    References listed on IDEAS

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    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
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    3. Giancarlo Corsetti & André Meier & Gernot J. Müller, 2012. "Fiscal Stimulus with Spending Reversals," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 878-895, November.
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    6. Kollmann, Robert, 2008. "Welfare-Maximizing Operational Monetary And Tax Policy Rules," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 112-125, April.
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    Cited by:

    1. Ma, Yong, 2014. "Monetary policy based on nonlinear quantity rule: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 89-104.

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    More about this item

    Keywords

    Sovereign debt; Debt stabilization; Welfare; Spending reversals; Spain;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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