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- Title
THE TRANSITIONAL DYNAMICS OF FISCAL POLICY IN SMALL OPEN ECONOMIES.
- Authors
Heijdra, Ben J.; Ligthart, Jenny E.
- Abstract
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.
- Subjects
FISCAL policy; MONOPOLISTIC competition; LABOR supply; INTERMEDIATE goods; ECONOMIC models; MACROECONOMICS
- Publication
Macroeconomic Dynamics, 2010, Vol 14, Issue 1, p1
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100509080286