American Economic Review: Vol. 102 No. 3 (May 2012)


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Fiscal Consolidation in an Open Economy

Article Citation

Erceg, Christopher J., and Jesper Lindé. 2012. "Fiscal Consolidation in an Open Economy." American Economic Review, 102(3): 186-91.

DOI: 10.1257/aer.102.3.186


his 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.

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Erceg, Christopher J. (Federal Reserve Board)
Lindé, Jesper (Federal Reserve Board)

JEL Classifications

E62: Fiscal Policy
F41: Open Economy Macroeconomics
F42: International Policy Coordination and Transmission
E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian
E52: Monetary Policy

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