Fiscal Policy and Welfare in a Small Open Economy with Imperfect Competition

Michele Santoni

Bulletin of Economic Research, 1999, vol. 51, issue 4, 287-317

Abstract: This paper considers the effects of fiscal policy in a two-sector small open economy, with unionized labour markets, and heterogeneous types of imperfect competition in the product markets. By making the marginal propensity to import endogenous, the paper shows that there is no robust or general relationship between the balanced-budget multiplier and the degree of imperfect competition. The fiscal multiplier with distortionary taxes can be positive or negative, depending on the size of the importables sector and the foreign firm's market share. The normative rule for fiscal policy depends on the size of the fiscal multiplier. An increase in economic activity is insufficient by itself to induce the government to over-supply public goods relative to the Walrasian case. Copyright 1999 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Date: 1999
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