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Savers, Spenders and Fiscal Policy in a Small Open Economy

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Author Info
Egil Matsen () (Norwegian University of Science and Technology and Norges Bank)
Tommy Sveen () (Norges Bank)
Ragnar Torvik () (Norwegian University of Science and Technology and Norges Bank)

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Abstract

This paper analyzes the effects of fiscal policy in an open economy. We extend the savers-spenders theory of Mankiw (2000) to a small open economy with endoge- nous labor supply. We first show how the Dornbusch (1983) consumption-based real interest rate for open economies is modified when labor supply is endogenous. We then turn to the effects of fiscal policy when there are both savers and spenders. With this heterogeneity taken into account, tax cuts have a short-run contractionary effect on domestic production, and increased public spending has a short-run expan- sionary effect. Although consistent with recent empirical work, this result contrasts with those of most other theoretical models. Transitory changes in demand have per- manent real effects in our model, and we discuss the implications for real exchange- rate dynamics. We also show how "rational" savers may magnify or dampen the responses of "irrational" spenders, and show how this is related to features of the utility functions.

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Publisher Info
Paper provided by Norges Bank in its series Working Paper with number 2004/18.

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Length: 28 pages
Date of creation: 29 Dec 2004
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Handle: RePEc:bno:worpap:2004_18

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Related research
Keywords: rule-of-thumb consumers fiscal policy open economy

Other versions of this item:

Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Roberto Perotti, 2005. "Estimating the effects of fiscal policy in OECD countries," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  2. N. Gregory Mankiw, 1999. "The Savers-Spenders Theory of Fiscal Policy," Harvard Institute of Economic Research Working Papers 1888, Harvard - Institute of Economic Research.
    Other versions:
  3. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-53, February. [Downloadable!] (restricted)
    Other versions:
  4. Wolff, Edward N, 1998. "Recent Trends in the Size Distribution of Household Wealth," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 131-50, Summer. [Downloadable!] (restricted)
  5. Galí, Jordi & Lopez-Salido, Jose David & Vallés Liberal, Javier, 2004. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," CEPR Discussion Papers 4347, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May. [Downloadable!] (restricted)
  7. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April. [Downloadable!] (restricted)
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  8. Persson, Torsten, 1985. "Deficits and intergenerational welfare in open economies," Journal of International Economics, Elsevier, vol. 19(1-2), pages 67-84, August. [Downloadable!] (restricted)
    Other versions:
  9. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Economics Working Papers 015, European Network of Economic Policy Research Institutes. [Downloadable!]
  10. Jordi Galí & Tommaso Monacelli, 2004. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Economics Working Papers 835, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  11. Poterba, James M, 1988. "Are Consumers Forward Looking? Evidence from Fiscal Experiments," American Economic Review, American Economic Association, vol. 78(2), pages 413-18, May. [Downloadable!] (restricted)
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  12. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  13. Boskin, Michael J, 1988. "Consumption, Saving, and Fiscal Policy," American Economic Review, American Economic Association, vol. 78(2), pages 401-07, May. [Downloadable!] (restricted)
  14. repec:fth:harver:1435 is not listed on IDEAS
  15. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Working Paper Series 168, European Central Bank. [Downloadable!]
  16. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November. [Downloadable!] (restricted)
    Other versions:
  17. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
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  19. Amato, Jeffery D. & Laubach, Thomas, 2003. "Rule-of-thumb behaviour and monetary policy," European Economic Review, Elsevier, vol. 47(5), pages 791-831, October. [Downloadable!] (restricted)
  20. Haltiwanger, John & Waldman, Michael, 1985. "Rational Expectations and the Limits of Rationality: An Analysis of Heterogeneity," American Economic Review, American Economic Association, vol. 75(3), pages 326-40, June. [Downloadable!] (restricted)
    Other versions:
  21. Perotti, Roberto, 2005. "Estimating the Effects of Fiscal Policy in OECD Countries," CEPR Discussion Papers 4842, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jan F. Qvigstad, 2006. "When does an interest rate path “look good”? Criteria for an appropriate future interest rate path," Working Paper 2006/05, Norges Bank. [Downloadable!]
  2. Gábor P. Kiss, 2007. "One-off and off-budget items: An alternative approach," MNB Conference Volume, Magyar Nemzeti Bank (The Central Bank of Hungary), vol. 1(1), pages 18-27, December. [Downloadable!]
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