We characterize optimal taxation of foreign capital and optimal sovereign debt policy in a small open economy where the government cannot commit to policy and seeks to insure a risk averse domestic constituency. The expected tax on capital is shown to vary with the state of the economy,...

The paper presents a model of sovereign debt repayment based in a tragedy of the commons. It is shown that sovereign debt is issued and repaid in equilibrium, even when contracts a la Bulow-Rogoff are available to a country that defaults.

Inflation and unemployment are central issues in macroeconomics. While much progress has been made on these issues by incorporating frictions using search theory, existing models analyze either unemployment or inflation. We develop a framework to analyze unemployment and inflation together. This...