- Efficient Expropriation: Sustainable Fiscal Policy in a Small Open Economy
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- by Gopinath, Gita; Aguiar, Mark; Amador, Manuel
- 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 endogenously varies
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 lack of commitment that generate investment cycles
even in an environment where first best capital stock is constant.
- Publication Type: WCFIA Working Paper
- Published Date: January 10, 2006
- Field of Interest: International Economics
- Gopinath, Gita, Mark Aguiar, and Manuel Amador. "Efficient Expropriation: Sustainable Fiscal Policy in a Small Open Economy." Working Paper 2008-0035, Weatherhead Center for International Affairs, Harvard University, January 2006.