Borrow and Adjust. Fiscal Policy and Sectoral Adjustment in an Open Economy

Erling Steigum and O. Thogersen

Working Papers from Norwegian School of Economics and Business Administration-

Abstract: Should the government run fiscal deficits in response to an adverse external shock that reduces national income permanently, warranting transfer of resources from production of non-traded to traded goods? This paper considers fiscal policy implications of sectoral adjustment costs in a model with non-Ricardian concumers. We show that even in the absence of nominal rigidities, temporary fiscal deficits increase social welfare if sectoral adjustment costs prevent immediate adjustment. If there are no adjustment costs, the case for fiscal deficits vanishes.

Keywords: FISCAL POLICY; SOCIAL WELFARE; DEFICIT (search for similar items in EconPapers)
JEL-codes: E62 F41 H62 (search for similar items in EconPapers)
Pages: 29 pages
Date: 1998
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Related works:
Journal Article: Borrow and Adjust: Fiscal Policy and Sectoral Adjustment in an Open Economy (2003)
Working Paper: Borrow and Adjust: Fiscal Policy and Sectoral Adjustment in an Open Economy (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:norgee:28/98

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