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External Debt and Stabilizing Macroeconomic Policies

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  • Piergallini, Alessandro

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.

Suggested Citation

  • Piergallini, Alessandro, 2015. "External Debt and Stabilizing Macroeconomic Policies," MPRA Paper 89272, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:89272
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Fiscal-Monetary Interactions; Foreign Debt; Equilibrium Determinacy.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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