Fiscal Policy in Small Open Economies: The International Intertemporal Keynesian Cross

A recent literature studies fiscal policy with realistic intertemporal marginal propensities to consume and the absence of Ricardian equivalence. This literature shows that fiscal policy boosts consumption and is effective: (i) Cumulative fiscal multipliers are above one, and (ii) fiscal policy is fully self-financing. I show this does not extend to small open economies by providing conditions where (i) the cumulative fiscal multiplier is exactly one, and (ii) fiscal deficits are not fully self-financing. This is because the initial debt-fueled rise in consumption is offset by a drop to repay foreign debt. Finally, I provide conditions to overturn this result.