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Fiscal Consolidation in an Open Economy

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Abstract:

This paper uses a New Keynesian DSGE model of a small open economy to compare how the effects of fiscal consolidation differ depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important differences in the impact of fiscal shocks across these monetary regimes that depend both on the duration of the zero lower bound and on features that determine the responsiveness of inflation.

Document Type: Research Article

DOI: http://dx.doi.org/10.1257/aer.102.3.186

Publication date: May 1, 2012

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aea/aer/2012/00000102/00000003/art00031
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