This paper examines under what conditions fiscal policy in the form of government spending should contribute to macroeconomic stabilisation.  To this end optimal fiscal targeting rules minimising the microfounded social loss are examined in the following settings.  Firstly, for the benchmark...

We consider optimal monetary and fiscal policies in a New Keynesian model of a small open economy with sticky prices and wages.  In this benchmark setting monetary policy is all we need - analytical results demonstrate that variations in government spending should play no role in the...