Savers, Spenders and Fiscal Policy in a Small Open Economy

Egil Matsen, Tommy Sveen and Ragnar Torvik

No 1618, CESifo Working Paper Series from CESifo

Abstract: This paper analyzes the effects of fiscal policy in an open economy. We extend the savers-spenders theory of Mankiw (2000) to a small open economy with endogenous labor supply. We first show how the Dornbusch (1983) consumption-based real interest rate for open economies is modified when labor supply is endogenous. We then turn to the effects of fiscal policy when there are both savers and spenders. With this heterogeneity taken into account, tax cuts have a short-run contractionary effect on domestic production, and increased public spending has a short-run expansionary effect. Although consistent with recent empirical work, this result contrasts with those of most other theoretical models. Transitory changes in demand have permanent real effects in our model, and we discuss the implications for real exchange-rate dynamics. We also show how “rational” savers may magnify or dampen the responses of “irrational” spenders, and show how this is related to features of the utility functions.

Keywords: rule-of-thumb consumers; fiscal policy; open economy (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Savers, Spenders and Fiscal Policy in a Small Open Economy (2007)
Working Paper: Savers, Spenders and Fiscal Policy in a Small Open Economy (2004)
Working Paper: Savers, Spenders and Fiscal Policy in a Small Open Economy (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1618

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