This paper asks whether recent findings that debt-financed fiscal policy raises consumption, yields cumulative multipliers above one, and is fully self-financing continue to hold in small open economies. Using a model that incorporates realistic intertemporal marginal propensities to consume and departs from Ricardian equivalence, the author examines how external borrowing and subsequent repayment interact with domestic consumption responses. The central contribution is to identify conditions under which the textbook results fail in a small open-economy setting, and to describe when those failures can be overturned.
Realistic intertemporal consumption; Small open-economy setting; Cumulative fiscal multiplier; Self-financing fiscal deficits
Data and methods
The paper builds on a theoretical literature that relaxes Ricardian equivalence and uses realistic intertemporal marginal propensities to consume. The abstract presents a model-based analysis (an intertemporal Keynesian cross adapted to open economies) to trace how debt-financed fiscal expansions affect consumption and external obligations. The source does not report empirical estimation details or specific data samples in the abstract.
Main findings
In contrast to prior results for closed economies, the author shows conditions in which (i) the cumulative fiscal multiplier equals one, and (ii) fiscal deficits are not fully self-financing in a small open economy. The mechanism described is that an initial, debt-fueled rise in consumption can be offset later by reduced consumption used to repay foreign debt. The abstract also states the paper provides conditions under which the closed-economy results can be recovered.
- Cumulative multiplier can be reduced to exactly one in the small open-economy specification.
- Fiscal deficits need not be self-financing because of subsequent repayment to foreign creditors.
