THE TRANSITIONAL DYNAMICS OF FISCAL POLICY IN SMALL OPEN ECONOMIES

Ben Heijdra () and Jenny Ligthart

Macroeconomic Dynamics, 2010, vol. 14, issue 1, 1-28

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.

Date: 2010
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Related works:
Working Paper: The Transitional Dynamics of Fiscal Policy in Small Open Economies (2006)
Working Paper: The Transitional Dynamics of Fiscal Policy in Small Open Economies (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:14:y:2010:i:01:p:1-28_08

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