“Quadrilemma not Trilemma: Fiscal Policy Matters”

Hao Jin, Xiamen University


This paper uses a small open economy dynamic stochastic general equilibrium model to analytically characterize a fiscal policy regime in which the open economy macroeconomic policy trilemma breaks down. I show that in this "active" fiscal policy regime, fiscal and monetary policy interact to determine the magnitude of exchange rate depreciation, while monetary policy and capital controls manage the timing of the depreciation.