The transitional dynamics of fiscal policy in small open economies

Ben J. Heijdra*, Jenny E. Ligthart

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

5 Citations (Scopus)

Abstract

We study the dynamic macroeconomic effects of fiscal shocks under lump-sum tax financing. To this end, we develop an intertemporal macroeconomic model for a small open economy, featuring monopolistic competition in the intermediate goods market, endogenous (intertemporal) labor supply, and finitely lived households. Fiscal shocks are shown to yield endogenously determined (dampened) cycles for a realistic calibration of the model. Impulse response functions of fiscal policy shocks in the finite-horizon model differ substantially from those resulting from an infinitely lived representative agent model. This can be explained by the presence of Ethier-productivity effects, which increase the size of long-run output multipliers to a greater extent in the infinite-horizon model.

Original languageEnglish
Pages (from-to)1-28
Number of pages28
JournalMacroeconomic Dynamics
Volume14
Issue number2
DOIs
Publication statusPublished - Feb-2010

Keywords

  • Fiscal Policy
  • Output Multipliers
  • Blanchard-Yaari Overlapping Generations
  • Monopolistic Competition
  • Small Open Economy Model
  • INVESTMENT TAX CREDIT
  • MONOPOLISTIC COMPETITION
  • INCREASING RETURNS
  • CAPITAL ACCUMULATION
  • TIME PREFERENCE
  • PRODUCTIVITY SHOCKS
  • HABIT FORMATION
  • MODELS
  • SCALE
  • DEBT

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