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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: b.j.heijdra@rug.nl.
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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

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