The new open economy macroeconomics of government debt |
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Authors: | Giovanni Ganelli |
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Affiliation: | International Monetary Fund, Fiscal Affairs Department, Room 7-216 C, 700 19th Street, N.W., Washington, DC 20431, USA |
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Abstract: | In this paper we introduce an overlapping generations structure of the Blanchard (J. Polit. Econ. 93 (1985) 121) type in a New Open Economy Macroeconomics (NOEM) model. This allows us to study a wider range of fiscal shocks compared to the traditional Mundell-Fleming (MF) and to the baseline Redux models. We show that a debt-financed tax cut appreciates the short-run exchange rate, but this result is reversed in the long run. A debt-financed increase of government spending, on the other hand, has ambiguous exchange rate effects. Our model also provides a bridge between the NOEM framework and the MF model. |
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Keywords: | Fiscal policy Overlapping generations New open economy macroeconomics Debt Tax cut |
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