Stabilization policy in an open economy

The scope for an active demand management policy is considered for a small open economy. Business cycle fluctuations generated by supply and demand shocks are shown to imply welfare losses when agents are risk averse and the capital market incomplete. Public demand for non-tradeables has real effect...

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Bibliographic Details
Published in:Journal of macroeconomics 2002-09, Vol.24 (3), p.293-312
Main Authors: Andersen, Torben M., Holden, Steinar
Format: Article
Language:English
Subjects:
Aggregate analysis
Aggregate risk
Business cycles
Consumption
Demand management
Economic models
Economic stabilization
Economic theory
Fiscal policy
Macroeconomics
Open economies
Risk
Social insurance
Social security
Stabilization policy
Studies
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Summary:The scope for an active demand management policy is considered for a small open economy. Business cycle fluctuations generated by supply and demand shocks are shown to imply welfare losses when agents are risk averse and the capital market incomplete. Public demand for non-tradeables has real effects and there is a welfare case for pursuing a demand management policy which stabilizes consumption. It is argued that this type of stabilization can be attained via automatic stabilizers based on nominal budgeting rules.
ISSN:0164-0704
1873-152X
DOI:10.1016/S0164-0704(02)00039-3