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The Effects of Government Spending Under Limited Capital Mobility

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  • Wenyi Shen
  • Shu-Chun S. Yang

Abstract

This paper studies the effects of government spending under limited international capital mobility, as featured by most developing countries. While external financing of government debt mitigates the crowding-out effect, it generates real appreciation, which contracts traded output and lowers the fiscal multiplier in the short run. The decline of the multiplier is larger when facing debt-elastic country risk premia. Also, government spending is more expansionary with more home bias in government purchases, more sectoral rigidities, and a less flexible exchange rate. Whether the twin-deficit hypothesis holds depends crucially on the extent to which government deficits are financed externally.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/129.

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Length: 41
Date of creation: 01 May 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/129

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Related research

Keywords: Fiscal policy; Developing countries; Budget deficits; Economic models; External borrowing; Government expenditures; Reserve management policy; government spending; external financing; fiscal multiplier; fiscal multipliers; government debt; current account; foreign borrowing; account deficits; current account deficits; fiscal deficits; public debt; central bank; fiscal adjustments; budget constraint; foreign debt; external debt; debt services; domestic borrowing; fiscal rules; external public debt; government deficits; domestic saving; fiscal adjustment; public spending; domestic financing; domestic currency; current account adjustment; government budget; reserve bank; debt sustainability; fiscal measures; external funding; expansionary fiscal; fiscal sustainability; fiscal solvency; government spending multipliers; private debt; government spending shocks; balance of payment; fiscal expansions;

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  1. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. VĂ©gh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  2. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
  3. Edward C. Skelton, 2008. "Reaching Mexico's unbanked," Economic Letter, Federal Reserve Bank of Dallas, vol. 3(jul).
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