Intertemporal budget policies and macroeconomic adjustment in a small open economy

This paper analyzes the role of nominal assets in ranking intertemporal budget policies in a growing open economy. Budget policies are ranked in terms of the public's intertemporal tax liability. In our small open economy model, the constraint for the valuation of private and public financial assets is in terms of the exogenous foreign price level. We show that this limits, under purchasing power parity, the scope of the government to influence the real value of financial assets using fiscal and monetary policy instruments. Keywords: Government budget: Taxation: Nominal assets: Growth