Hostname: page-component-cd9895bd7-fscjk Total loading time: 0 Render date: 2024-12-23T05:17:05.121Z Has data issue: false hasContentIssue false
  • English
  • Français

THE TRANSITIONAL DYNAMICS OF FISCAL POLICY IN SMALL OPEN ECONOMIES

Published online by Cambridge University Press:  18 December 2009

Ben J. Heijdra  and
Jenny E. Ligthart
Ben J. Heijdra*
Affiliation:
University of Groningen, IHS-Vienna, Netspar and CESifo
Jenny E. Ligthart
Affiliation:
Tilburg University, University of Groningen and CESifo
*
Address correspondence to: Ben J. Heijdra, Department of Economics, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

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.

Keywords

Fiscal PolicyOutput MultipliersBlanchard–Yaari Overlapping GenerationsMonopolistic CompetitionSmall Open Economy Model
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 1 , February 2010 , pp. 1 - 28
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Baxter, M. and King, R. G. (1993) Fiscal policy in general equilibrium. American Economic Review 83, 315–334.Google Scholar
Bénassy, J.-P. (1996) Monopolistic competition, increasing returns to specialisation, and output persistence. Economics Letters 52, 187–191.CrossRefGoogle Scholar
Benhabib, J. and Farmer, R. E. A. (1994) Indeterminacy and increasing returns. Journal of Economic Theory 63, 19–41.CrossRefGoogle Scholar
Bernheim, B. D. (1987) Ricardian equivalence: An evaluation of theory and evidence. NBER Macro-economics Annual 2, 263–304.CrossRefGoogle Scholar
Blanchard, O.-J. (1985) Debt, deficits, and finite horizons. Journal of Political Economy 93, 223–247.CrossRefGoogle Scholar
Bovenberg, A. L. (1993) Investment-promoting policies in open economies: The importance of intergenerational and international distribution effects. Journal of Public Economics 51, 3–54.CrossRefGoogle Scholar
Broer, D. P. and Heijdra, B. J. (2001) The investment tax credit under monopolistic competition. Oxford Economic Papers 53, 318–351.CrossRefGoogle Scholar
Buiter, W. (1981) Time preference and international lending and borrowing in an overlapping generations model. Journal of Political Economy 89, 769–797.CrossRefGoogle Scholar
Buiter, W. H. and Kletzer, K. (1991) The welfare economics of cooperative and non-cooperative fiscal policy. Journal of Economic Dynamics and Control 15, 215–244.CrossRefGoogle Scholar
Caballero, R. J. and Lyons, R. K. (1992) External effects in U.S. procyclical productivity. Journal of Monetary Economics 29, 209–225.CrossRefGoogle Scholar
Cardia, E. (1991) The dynamics of a small open economy in response to monetary, fiscal, and productivity shocks. Journal of Monetary Economics 28, 411–434.CrossRefGoogle Scholar
Chang, W. (1999) Government spending, endogenous labor, and capital accumulation. Journal of Economic Dynamics and Control 23, 1225–1242.CrossRefGoogle Scholar
Coto-Martinez, J. and Dixon, H. (2003) Profits, markups, and entry: Fiscal policy in an open economy. Journal of Economic Dynamics and Control 27, 573–597.CrossRefGoogle Scholar
Devereux, M. B., Head, A. C., and Lapham, B. J. (1996) Monopolistic competition, increasing returns, and the effects of government spending. Journal of Money, Credit, and Banking 28, 233–253.CrossRefGoogle Scholar
Diamond, P. A. (1965) National debt in a neoclassical growth model. American Economic Review 55, 1126–1150.Google Scholar
Dixit, A. and Stiglitz, J. E. (1977) Monopolistic competition and optimum product diversity. American Economic Review 67, 297–308.Google Scholar
Ethier, W. J. (1982) National and international returns to scale in the modern theory of international trade. American Economic Review 72, 389–405.Google Scholar
Fatás, A. (1997) Multipliers, imperfect competition or increasing returns to scale. Economics Letters 57, 197–201.CrossRefGoogle Scholar
Frenkel, J. A. and Razin, A. (1987) Fiscal Policies and the World Economy. Cambridge, MA: MIT Press.Google Scholar
Giavazzi, F. and Wyplosz, C. (1985) The zero root problem: A note on the dynamic determination of the stationary equilibrium in linear models. Review of Economic Studies 52, 353–357.CrossRefGoogle Scholar
Giovannini, A. (1988) The real exchange rate, the capital stock, and fiscal policy. European Economic Review 32, 1747–1767.CrossRefGoogle Scholar
Heijdra, B. J. (1998) Fiscal policy multipliers: The role of monopolistic competition, scale economies, and intertemporal substitution in labor supply. International Economic Review 39, 659–696.CrossRefGoogle Scholar
Heijdra, B. J. and Ligthart, J. E. (2006) The Transitional Dynamics of Fiscal Policy in Small Open Economies. CESifo, Munich, Working Paper 1777.CrossRefGoogle Scholar
Heijdra, B. J. and Ligthart, J. E. (2007) Fiscal policy, monopolistic competition, and finite lives. Journal of Economic Dynamics and Control 31, 325–359.CrossRefGoogle Scholar
Heijdra, B. J. and Ligthart, J. E. (2008) The Transitional Dynamics of Fiscal Policy in Open Economies: Mathematical Appendix. Mimeo, University of Groningen. Available at http//www.heijdra.org/SOEapp.pdf, accessed July 1, 2008.Google Scholar
Hornstein, A. (1993) Monopolistic competition, increasing returns to scale, and the importance of productivity shocks. Journal of Monetary Economics 31, 299–316.CrossRefGoogle Scholar
Judd, K. L. (1982) An alternative to steady-state comparisons in perfect foresight models. Economics Letters 10, 55–59.CrossRefGoogle Scholar
Karayalçin, C. (1999) Temporary and permanent government spending in a small open economy. Journal of Monetary Economics 43, 125–141.CrossRefGoogle Scholar
Karayalçin, C. (2003) Habit formation and government spending in a small open economy. Macro-economic Dynamics 7, 407–423.CrossRefGoogle Scholar
Letendre, M.-A. (2004) Capital utilization and habit formation in a small open economy model. Canadian Journal of Economics 37, 721–741.CrossRefGoogle Scholar
Mendoza, E. (1991) Real business cycles in a small-open economy. American Economic Review 81, 797–818.Google Scholar
Schmitt-Grohe, S. (1997) Comparing four models of aggregate fluctuations due to self-fulfilling expectations. Journal of Economic Theory 72, 96–147.CrossRefGoogle Scholar
Schmitt-Grohe, S. and Uribe, M. (2003) Closing small open economy models. Journal of International Economics 61, 163–185.CrossRefGoogle Scholar
Sen, P. and Turnovsky, S. J. (1989) Tariffs, capital accumulation, and the current account in a small open economy. International Economic Review 30, 811–831.CrossRefGoogle Scholar
Sen, P. and Turnovsky, S. J. (1990) Investment tax credit in an open economy. Journal of Public Economics 42, 277–299.CrossRefGoogle Scholar
Shi, S. and Epstein, L. G. (1993) Habits and time preference. International Economic Review 34, 61–84.CrossRefGoogle Scholar
Turnovsky, S. J. (2002) Knife-edge conditions and the macroeconomic dynamics of small open economies. Macroeconomic Dynamics 6, 307–335.CrossRefGoogle Scholar
Turnovsky, S. J. and Sen, P. (1991) Fiscal policy, capital accumulation, and debt in an open economy. Oxford Economic Papers 43, 1–24.CrossRefGoogle Scholar
Uzawa, H. (1969) Time preference and the penrose effect in a two-class model of economic growth. Journal of Political Economy 77, 628–652.CrossRefGoogle Scholar
Yaari, M. E. (1965) Uncertain lifetime, life insurance, and the theory of the consumer. Review of Economic Studies 32, 137–150.CrossRefGoogle Scholar