If expansionary fiscal policy is inflationary, then expansionary fiscal policy forces an inflation-targeting central bank to be somewhat more restrictive in its monetary policy. This altered central bank policy comes at a cost in terms of output which has to be calculated against the output gain...

We document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk-averse lenders and lack of monetary policy...