Aguiar, Mark; Amador, Manuel - National Bureau of Economic Research (NBER) - 2011
We study optimal fiscal policy in a small open economy (SOE) with sovereign and private default risk. The SOE …'s government uses linear taxation to fund exogenous expenditures and uses public debt to inter-temporally allocate tax distortions … run outcome if the private agents are impatient relative to the international interest rate and the economy is subject to …