Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Boston
Working Papers
Efficient expropriation: sustainable fiscal policy in a small open economy
Mark Aguiar
Manuel Amador
Gita Gopinath

We study a small open economy characterized by two empirically important frictions— incomplete financial markets and an inability of the government to commit to policy. We characterize the best sustainable fiscal policy and show that it can amplify and prolong shocks to output. In particular, even when the government is completely benevolent, the government’s credibility not to expropriate capital varies endogenously with the state of the economy and may be “scarcest” during recessions. This increased threat of expropriation depresses investment, prolonging downturns. It is the incompleteness of financial markets and the lack of commitment that generate investment cycles even in an environment where first-best capital stock is constant.

Download Full text
Download Full text
Cite this item
Mark Aguiar & Manuel Amador & Gita Gopinath, Efficient expropriation: sustainable fiscal policy in a small open economy, Federal Reserve Bank of Boston, Working Papers 06-9, 2006.
More from this series
JEL Classification:
Subject headings:
Keywords: Fiscal policy
For corrections, contact Catherine Spozio ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal