Persistent fiscal expansions in sudden-stop crises: The expectation channel

This paper investigates the state-dependent effects of government spending shocks in an open economy with stock collateral constraints. When the constraint is binding, a persistent fiscal expansion induces a series of real exchange rate appreciations, boosts asset prices, and improves a country's borrowing opportunities. In line with evidence from sudden-stop economies, our analysis shows that, relative to a low-persistence environment, a unitary government spending shock generates a stronger consumption multiplier and a larger trade deficit as the fiscal rule becomes more persistent.