Does Openness Amplify Money‐Financed Fiscal Stimulus? A Fiscal Theory Perspective

ABSTRACT Does economic openness enhance or diminish the effectiveness of money‐financed (MF) fiscal stimulus? This study re‐examines this question within a small open economy framework, emphasizing the fiscal regime governing government debt valuation. While the authors of an earlier study show that MF fiscal expansions generate larger output responses as openness increases, we demonstrate that this conclusion is not robust when the fiscal theory of the price level (FTPL) is operative. Under the FTPL, the relationship between openness and the output response to MF fiscal stimulus becomes fiscal‐regime contingent. Specifically, under normal conditions, greater openness weakens the output response, reversing the positive openness–multiplier relationship documented in the existing literature. In contrast, under strong deflationary pressure such as at the zero lower bound, greater openness amplifies the output response, although through a distinct transmission mechanism. Our analysis is primarily a positive, regime‐comparison study. As a supplementary normative benchmark, we also report a welfare comparison based on a second‐order approximation of household utility. The broader implication is cautionary: policy conclusions drawn under a Ricardian framework may not generalize to environments in which fiscal‐monetary interactions are central to price‐level determination.