An optimal government spending reversal rule in a small open economy

► This paper reexamines debt stabilization policy in a small open economy. ► Spending reversals are incorporated as a policy option available to policy-makers. ► Results show that a spending reversal rule can be welfare-improving. ► An optimal reversal rule lowers both tax rate and interest rate volatilities. ► As friction in foreign borrowing is greater, the welfare benefit will increase.