This paper investigates
the dynamic effects of fiscal and monetary feedback policy rules in a small
open economy with flexible exchange rates and risk premia on external debt. It
is shown that equilibrium uniqueness and stability occur under locally
Ricardian fiscal policies regardless of the degree of reaction of nominal
interest rates to inflation, in contrast with closed-economy environments.
Fiscal revaluation mechanisms of the type predicted by the fiscal theory of the
price level are precluded by international parity conditions. As a result,
locally non-Ricardian fiscal policies are destabilizing even under an
accommodating monetary policy stance.
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