Government Expenditures in a Small Open Economy Model: The Role of Credit Constraint

Zhe Wu
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Zhe Wu: Monash University

Warwick-Monash Economics Student Papers from Warwick Monash Economics Student Papers

Abstract: We investigate the role of international credit market constraint in a dynamic stochastic general equilibrium model in determining the effect of government spending policies on macroeconomic variables such as consumption and the real exchange rate in a small open economy. The numerical results show that increasing government expenditure under certain economic shocks can increase the value of the real exchange rate and reduce the chance of the small open economy reaching the borrowing limit. Hence, the dynamics of consumption and the real exchange rate can be significantly affected by government spending policies under international credit market constraints.

Keywords: Credit Constraint; Real Exchange Rate; Government Spending JEL Classification: F41 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:wrkesp:42

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