Elastic Capital Supply and the Effects of Fiscal Policy

Jim Dolmas and Mark Wynne

Economic Inquiry, 1998, vol. 36, issue 4, 553-74

Abstract: Existing analyses of the effects of fiscal policy in general equilibrium models have typically been conducted under the assumption that the long-run supply of capital is perfectly elastic at a fixed rate of time preference. These analyses have shown that the long-run response of the capital stock to changes in fiscal policy is crucial to generating the potential for 'multiplier' effects in these models. In this paper, the authors ask what the implications of relaxing the assumption of perfectly elastic capital supply are for the analysis of fiscal policy. They show that, with less than perfectly elastic capital supply, the potential for multipliers is actually enhanced. Copyright 1998 by Oxford University Press.

Date: 1998
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