THE TRANSITIONAL DYNAMICS OF FISCAL POLICY IN SMALL OPEN ECONOMIES

We study the dynamic macroeconomic effects of fiscal shocks under lump-sum tax financing. To this end, we develop an intertemporal macroeconomic model for a small open economy, featuring monopolistic competition in the intermediate goods market, endogenous (intertemporal) labor supply, and finitely...

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Bibliographic Details
Published in:Macroeconomic dynamics 2010-02, Vol.14 (1), p.1-28
Main Authors: Heijdra, Ben J., Ligthart, Jenny E.
Format: Article
Language:English
Subjects:
Calibration
Consumption
Economic models
Economic theory
Economies of scale
Fiscal policy
Households
Labor market
Labor supply
Macroeconomics
Monopolistic competition
Productivity
Studies
Taxation economics
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Summary:We study the dynamic macroeconomic effects of fiscal shocks under lump-sum tax financing. To this end, we develop an intertemporal macroeconomic model for a small open economy, featuring monopolistic competition in the intermediate goods market, endogenous (intertemporal) labor supply, and finitely lived households. Fiscal shocks are shown to yield endogenously determined (dampened) cycles for a realistic calibration of the model. Impulse response functions of fiscal policy shocks in the finite-horizon model differ substantially from those resulting from an infinitely lived representative agent model. This can be explained by the presence of Ethier-productivity effects, which increase the size of long-run output multipliers to a greater extent in the infinite-horizon model.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100509080286