This paper fills a gap in the literature by focusing on the degree of self-financing of tax cuts in a New Keynesian two-country model. We find that the degree of self-financing of income tax cuts is negative on impact but it quickly becomes positive. The open economy dimension does not matter much for the long-run degree of self financing. This is because the main channel through which the open economy dimension affects the results-an expenditure switching effect stemming from exchange rate

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... eciation-is not active in the new steady state, in which the economy reaches a new flexible-price equilibrium. JEL Classification: E62, F41, H2