How Effective is Government Spending in a Small Open Economy with Distortionary Taxes

Carlos García and Jorge Restrepo ()
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Jorge Restrepo: Banco Central de Chile, http://www.bcentral.cl

ILADES-UAH Working Papers from Universidad Alberto Hurtado/School of Economics and Business

Abstract: We build a general equilibrium model of a small open economy, which includes rule-of-thumb consumers, and staggeredd prices and wages, as well as distortionary taxes. The analysis of government spending based on the responses to a government spending shock under three different rules and the sensitivity of several impact multipliers to alternative calibrations. The effect of the shock on consumption and GDP depends on the price elasticity of net exports; the share of rule-of-thumb consumers and domestic goods in the government basket; and finally, the fiscal rule in place. Indeed the response of consumption is more persistent with the rule that adjust spending to close the debt-financed deficit than with the other two rules.

Keywords: open economy; fiscal multiplier; rule of thumb consumers; government spending (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2007-08
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (8)

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