Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/55571
Authors: 
Aguiar, Mark
Amador, Manuel
Gopinath, Gita
Year of Publication: 
2006
Series/Report no.: 
Working paper series // Federal Reserve Bank of Boston 06-9
Abstract: 
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.
JEL: 
C91
C93
D01
D64
Document Type: 
Working Paper

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