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The Transitional Dynamics of Fiscal Policy in Small Open Economies

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  • Heijdra, B.J.
  • Ligthart, J.E.

    (Tilburg University)

Abstract

The paper studies the dynamic macroeconomic effects of fiscal shocks of various duration (permanent and temporary) under different financing methods (lump-sum tax and government debt). 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. Endogenous labor supply is crucial in generating cyclical adjustment paths and yields faster convergence to the new steady state compared with exogenous labor supply. The quantitative output effects and transitional dynamics of fiscal policy differ substantially from those of an infinitely lived representative agent model. In addition, government debt is key in making the timing of shocks matter, thus yielding permanent output effects of temporary fiscal shocks.

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Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-199394.

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Date of creation: 2006
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Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-199394

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Cited by:
  1. Pedro R. D. Bom & Jenny Ligthart, 2011. "Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1119, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. Romain Restout, 2008. "Monopolistic Competition and the Dependent Economy Model," Post-Print, HAL halshs-00260868, HAL.
  3. Heijdra, B.J. & Ligthart, J.E., 2006. "The Transitional Dynamics of Fiscal Policy in Small Open Economies," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-199394, Tilburg University.

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