This paper presents an overlapping generations model for a small open economy. The model is calibrated to fit data for Turkey. Simulations suggest that for a fairly open economy such as Turkey, credibility and liquidity constraints matter and the choice of income taxation rate, the mix of government spending and the long-run government debt/GDP ratio can all significantly affect the economic growth. The paper also examines the effectiveness of fiscal policy under different levels of liquidity constraint in an open economy within a dynamic framework. It shows that liquidity constraints can affect the outcome of any fiscal policy. Hence fiscal policy is even more important for the less developed economies of the world.

This paper presents an overlapping generations model for a small open economy. The model is calibrated to fit data for Turkey. Simulations suggest that for a fairly open economy such as Turkey, credibility and liquidity constraints matter and the choice of income taxation rate, the mix of government spending and the long-run government debt/GDP ratio can all significantly affect the economic growth. The paper also examines the effectiveness of fiscal policy under different levels of liquidity constraint in an open economy within a dynamic framework. It shows that liquidity constraints can affect the outcome of any fiscal policy. Hence fiscal policy is even more important for the less developed economies of the world.