The Short- and Long-Run Effects of Fiscal Policy

Edward F Buffie

The World Bank Economic Review, 1992, vol. 6, issue 2, 331-51

Abstract: This article develops a dynamic, dual-economy general equilibrium model that can be adapted to analyze the short- and long-run effects of a variety of fiscal policies. The model provides a complete description of how the private capital stock, underemployment, and real wages evolve during the adjustment process. The main policy message conveyed by the results is that the method by which the fiscal deficit is lowered is important. There is a strong presumption that higher prices for publicly produced intermediate inputs and cutbacks in government expenditure to support social infrastructure will reduce private investment, real wages in both the formal and informal sectors, and the share of the labor force employed in the high-wage manufacturing sector. By contrast, layoffs in the final goods and services sectors can potentially improve the external balance without sacrificing output and employment growth. Copyright 1992 by Oxford University Press.

Date: 1992
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