Essays on fiscal policy in closed and open economies

This dissertation analyzes the effects of fiscal policies in closed and open economies. It consists of three essays.; In the first essay I observe that after World War II about 75 percent of government expenditure in the U.S. economy has been spent on compensation of public employees. To assess the effects of exogenous fiscal policy shocks originating from military buildups, I introduce within a dynamic model economy the distinction between the goods and the employees' compensation components of government consumption. The distinction improves the quantitative performance of the model. The model with two categories of government spending delivers dynamic responses to a fiscal shock that match more closely their estimated counterparts relative to a model where the distinction is neglected.; In the second essay I set up a model economy that helps to reproduce the recent empirical evidence based on vector autoregression on the effects of exogenous increases in government purchases. This evidence shows that increases in private consumption and decreases in private investment follow positive shocks to government spending. A model with staggered prices, endogenous nominal interest rate setting and rule-of-thumb consumers can potentially replicate that evidence.; In the third essay, together with my coauthors, I show, for a sample of emerging market countries entering a currency crisis, that high levels of foreign debt are associated with excessive exchange rate devaluations and large output contractions. We develop a model, characterized by the presence of a borrowing constraint, that helps explain this evidence. The domestic country can borrow only up to a fraction of the value of its assets. Devaluations reduce the value of domestic assets relative to international liabilities and make countries with high foreign debt more likely to hit the borrowing constraint. When countries hit the constraint, a fire sale of domestic assets can lead to significant negative wealth effects. There can be a tradeoff between fixed and flexible exchange rate regimes. A fixed exchange regime can mitigate the negative wealth effect of the fire sale but at the cost of additional output. Under certain parameter configurations a fixed exchange rate regime dominates a flexible one.