This paper incorporates the effect of the central bank's independence into the government's optimum financing model. When the implications of the hypotheses are tested for eighteen OECD countries, this paper shows that countries with higher levels of central bank independence generate less...

According to conventional wisdom, fiscal policy is more effective under a fixed than under a flexible exchange rate regime. In this paper the authors reconsider the transmission of shocks to government spending across these regimes within a standard New Keynesian model of a small open economy....