The Transitional Dynamics of Fiscal Policy in Small Open Economies

Ben Heijdra () and Jenny Ligthart

No 1777, CESifo Working Paper Series from CESifo

Abstract: The paper studies the dynamic macroeconomic effects of fiscal shocks of various duration (permanent and temporary) under different financing methods (lump-sum tax and government debt). 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. Endogenous labor supply is crucial in generating cyclical adjustment paths and yields faster convergence to the new steady state compared with exogenous labor supply. The quantitative output effects and transitional dynamics of fiscal policy differ substantially from those of an infinitely lived representative agent model. In addition, government debt is key in making the timing of shocks matter, thus yielding permanent output effects of temporary fiscal shocks.

Keywords: fiscal policy; output multipliers; Blanchard-Yaari overlapping generations; monopolistic competition; small open economy (search for similar items in EconPapers)
JEL-codes: E12 E63 L16 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: THE TRANSITIONAL DYNAMICS OF FISCAL POLICY IN SMALL OPEN ECONOMIES (2010)
Working Paper: The Transitional Dynamics of Fiscal Policy in Small Open Economies (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1777

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