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Optimum government credibility in an open-economy fiscal expansion

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  • Daniel Ryan

Abstract

A real open-economy model is constructed in which the government's commitment to a future fiscal expansion is not credible. Government credibility (measured by the growth rate of the probability that the expansion will occur) becomes a parameter of the system and appears directly in the eigenvalues. Simulations are performed demonstrating the effect of credibility on GNP, the exchange rate, and other variables. Lastly, the optimum credibility is determined which minimizes a loss function associated with deviations from full employment. Copyright International Atlantic Economic Society 1998

Suggested Citation

  • Daniel Ryan, 1998. "Optimum government credibility in an open-economy fiscal expansion," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 4(4), pages 305-317, November.
    • Handle: RePEc:kap:iaecre:v:4:y:1998:i:4:p:305-317:10.1007/bf02295684
    DOI: 10.1007/BF02295684
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