Fiscal dominance, shocks, and the currency distribution of sovereign debt: the case of a small open economy
Date
2025-08
Authors
Di Iorio, Juan Pablo
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García Cicco, Javier
Journal Title
Journal ISSN
Volume Title
Publisher
Universidad de San Andrés. Departamento de Economía
Abstract
This study examines the effects of incorporating fiscal dominance, based on the Fiscal Theory of the Price Level, into a New Keynesian Small Open Economy (NK-SOE) model. This framework enables a comparison between the responses of an economy characterized by fiscal dominance and those of canonical NK-SOE models when faced with monetary or external shocks. Notable differences emerge in nominal variables, such as inflation rates and nominal devaluation, as well as in household consumption and the real exchange rate. Furthermore, the model is expanded to account for government debt issued in foreign currency, introducing a fiscal channel related to the currency composition of the government’s debt. Additionally, the structure of taxes and government expenditures—particularly fiscal revenues tied to the non-tradable sector—plays a significant role in shaping the economic response when the government issues debt in foreign currency.
Description
Fil: Di Iorio, Juan Pablo. Universidad de San Andrés. Departamento de Economía; Argentina.