The potential importance of fiscal policy in influencing inflation has recently been highlighted, following Woodford (1995), under the heading of the ‘Fiscal Theory of the Price Level’ (FTPL). Applications of this theory to open economies operating under flexible exchange rates has suggested...

Progress in financial integration calls for the abolition of capital controls, especially within the European community. Traditional analysis would then predict a better reallocation of productive capacity at the international level. A formal model is developed in order to show that it is...