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Ioana Moldovan, Mrs. Marina V Rousset, and Chris Walker
A low-income country such as Haiti that confronts an environment of diminishing aid inflows must assess tradeoffs among the available policy options: spending cuts, monetization, sales of debt, or use of foreign reserves. To provide the analytical tools for this task, the paper draws from a set of DSGE models recently developed to evaluate policy choices in low-income countries for which external aid flows represent an important revenue source. Two simplified stylized variations of the main model are used to gain intuition and initially assess the trdeaoffs. Subsequenctly a full-scale small open economy DSGE model, calibrated to match conditions in Haiti and in similar low-income countries, is employed. Several key results are common to all model versions. While sales of foreign exchange reserves can compensate for the loss of aid inflows, this strategy is not sustainable. The remaining policy choices entail larger welfare costs, involving lower consumption levels and real depreciation. The results suggest that a mixture of spending cuts and depreciation is the best strategy, when use of foreign reserves is constrained.
Ruoyun Mao and Susan Yang Shu-Chun
The theoretical literature generally finds that government spending multipliers are bigger than unity in a low interest rate environment. Using a fully nonlinear New Keynesian model, we show that such big multipliers can decrease when 1) an initial debt-to-GDP ratio is higher, 2) tax burden is higher, 3) debt maturity is longer, and 4) monetary policy is more responsive to inflation. When monetary and fiscal policy regimes can switch, policy uncertainty also reduces spending multipliers. In particular, when higher inflation induces a rising probability to switch to a regime in which monetary policy actively controls inflation and fiscal policy raises future taxes to stabilize government debt, the multipliers can fall much below unity, especially with an initial high debt ratio. Our findings help reconcile the mixed empirical evidence on government spending effects with low interest rates.
Ruoyun Mao and Susan Yang Shu-Chun

burden (modeled by a higher steady-state labor income tax rate), longer average debt maturity, and more responsive monetary policy to inflation. All these factors work through the intertemporal substitution effect channel. Although the government does not increase the tax rate in response to more debt in regime F, part of the additional debt is financed by increased tax revenues because of an enlarged tax base. Thus, with a higher steady-state tax rate, a bigger proportion of a spending increase is financed by taxes, so the debt amount to be inflated away is smaller

Michael T. Gapen, Mr. Thomas F. Cosimano, and Mr. Ralph Chami

addition to income from production, the household seeks to spread these additional resources across consumption and leisure according to their respective marginal utility. The reduction in steady-state labor supply leads to reduced domestic output, but the drop in income from production is not enough to offset the additional resources from remittances. Therefore, total household resources increase in the presence of remittances, despite the desire by the household to increase leisure. Increases in net household resources lead to an increase in household consumption