Analysis of Fiscal Shocks in a Small Open Economy with Home Production
AbstractIn view of the large scale of the nonmarket home sector in both developed and developing economies, in this paper we construct an open economy model with home production. We discuss both long-run and short-run impacts of fiscal policies such as income tax, consumption tax and government spending on factor allocation, capital formation and the current account. The main purpose of the paper is to elucidate the role of home production in an open economy environment. We show that in our framework both fiscal policy and the rate of substitution between market and home goods may affect the dynamic behavior of the economy. As a result, introducing home production may alter the effects of fiscal shocks on key variables in the economy. We confirm this fact by examining various policy experiments both in the short run and long run.
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Bibliographic InfoPaper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c015_009.
Length: 33 pages
Date of creation: Sep 2010
Date of revision:
Fiscal policy; home production; equilibrium dynamics;
Find related papers by JEL classification:
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
- D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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