Optimal fiscal consolidation under frictional financial markets Dejanir H. Silva
By: Silva, Dejanir H
.
Material type: 
ArticleSubject(s): UNION ECONOMICA Y MONETARIA | MERCADOS FINANCIEROS | POLITICA FISCAL | IMPOSICION OPTIMA
In:
The Economic Journal v. 133, n. 652, May 2023, p.1537-1585Summary: This paper studies optimal fiscal policy in a currency union subject to capital flow shocks in an economy with two main ingredients: (i) sticky prices and (ii) financially constrained arbitrageurs. Given capital outflows and high external debt, the fiscal authority faces a trade-off between stimulating the economy or paying off external debt. The planner reduces the value-added tax in the short run, while it raises and front-loads the sum of value-added tax and payroll taxes. It is not optimal to use spending to stimulate the economy. The country engages in a fiscal consolidation, as government debt falls compared with a passive fiscal policy.
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| Artículos | IEF | IEF | OP 282/2023/652-1 (Browse shelf) | Available | OP 282/2023/652-1 |
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| OP 282/2023/649-2 Policy uncertainty and information flows | OP 282/2023/651 The Economic Journal | OP 282/2023/652 The Economic Journal | OP 282/2023/652-1 Optimal fiscal consolidation under frictional financial markets | OP 282/2023/653 The Economic Journal | OP 282/2023/653-1 The effects of fiscal decentralisation on publicly provided services and labour markets | OP 282/2023/653-2 Production networks and international fiscal spillovers |
Resumen.
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This paper studies optimal fiscal policy in a currency union subject to capital flow shocks in an economy with two main ingredients: (i) sticky prices and (ii) financially constrained arbitrageurs. Given capital outflows and high external debt, the fiscal authority faces a trade-off between stimulating the economy or paying off external debt. The planner reduces the value-added tax in the short run, while it raises and front-loads the sum of value-added tax and payroll taxes. It is not optimal to use spending to stimulate the economy. The country engages in a fiscal consolidation, as government debt falls compared with a passive fiscal policy.
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