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Time consistency of government financial policy in a small open economy

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  • Huber, Bernd

Abstract

This paper derives sufficient conditions for the time-consistency of optimal fiscal policy in a small open economy. Results depend critically on the debt instruments used by the government. If the government employs only conventional debt, a sufficient condition for time-consistency is that the optimal policy equalizes tax rates across periods. If the government also issues consumption indexed debt, the optimal policy can always be made time consistent by an appropriate mix of conventional and indexed debt. For a specific example, a simple rule for indexed debt management can be derived.

Suggested Citation

  • Huber, Bernd, 1992. "Time consistency of government financial policy in a small open economy," Munich Reprints in Economics 19384, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:19384
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    Cited by:

    1. Liu, Xuan, 2013. "Time consistency of optimal monetary and fiscal policy in a small open economy," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 47-67.
    2. Torben M. Andersen & Robert R. Dogonowski, 2004. "What Should Optimal Income Taxes Smooth?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(3), pages 491-507, August.

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