Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model

Olivier Cardi and Romain Restout ()

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Abstract: This contribution shows that the duration of a fisscal shock together with sectoral capital intensity matter in determining the dynamic and steady-state effects in an intertemporal-optimizing two-sector small open economy model. First, unlike a permanent shock, net foreign asset position always worsens in the long-run after a transitory fiscal expansion. Second, steady-state changes in physical capital depend on sectoral capital-labor ratios but their signs may be reversed compared to the corresponding permanent public policy. Third, investment and the current account may now adjust non monotonically. Fourth, a temporary fiscal shock always crowds-out (crowds-in) investment in the long-run whenever the non traded (traded) sector is more capital intensive.

Keywords: current account; government spending; nontraded goods; temporary shocks (search for similar items in EconPapers)
Date: 2007-09
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00174574
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Citations: View citations in EconPapers (3)

Published in 2007

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Related works:
Working Paper: Permanent vs.temporary fiscal expansion in a two-sector small open economy model (2008)
Working Paper: Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00174574

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