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The Dynamics of Temporary Policies in a Small Open Economy

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  • Schubert, Stefan F
  • Turnovsky, Stephen J

Abstract

The paper corrects a subtle, but crucial, conceptual flaw in a solution procedure initially proposed in 1990 by Sen and Turnovsky to analyze anticipated regime changes in small open economies based on the intertemporal optimization of rational forward-looking agents. The problem is its failure to consider the intertemporal solvency of the economy consistently. The paper focuses on temporary shocks, although the procedure also applies to announced future permanent policy changes. Since the issue is generic and relevant to a large class of policy changes, it is important for the intertemporal solvency aspect to be incorporated consistently. The authors show that the seriousness of the error in the previous solution procedure depends upon the specific shock, and two contrasting examples are discussed. Copyright 2002 by Blackwell Publishing Ltd.

Suggested Citation

  • Schubert, Stefan F & Turnovsky, Stephen J, 2002. "The Dynamics of Temporary Policies in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 604-622, November.
  • Handle: RePEc:bla:reviec:v:10:y:2002:i:4:p:604-22
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    Citations

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    Cited by:

    1. Yasuhiro Nakamoto & Koichi Futagami, 2016. "Dynamic Analysis of a Renewable Resource in a Small Open Economy: The Role of Environmental Policies for the Environment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 64(3), pages 373-399, July.
    2. Olivier Cardi & Romain Restout, 2011. "Fiscal shocks in a two sector open economy," Working Papers hal-00567855, HAL.
    3. Olivier Cardi, 2009. "Habit persistence and effectiveness of fiscal policy in an open economy," Working Papers hal-00420138, HAL.
    4. Olivier Cardi & Peter Claeys & Romain Restout, 2016. "Imperfect Mobility Of Labor Across Sectors And Fiscal Transmission," Working Papers of BETA 2016-39, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    5. Cardi, Olivier & Restout, Romain, 2015. "Fiscal Shocks In A Two-Sector Open Economy With Endogenous Markups," Macroeconomic Dynamics, Cambridge University Press, vol. 19(08), pages 1839-1865, December.
    6. Olivier Cardi & Romain Restout, 2007. "Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model," Working Papers 0720, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    7. Cardi, Olivier, 2007. "Another View Of The J-Curve," Macroeconomic Dynamics, Cambridge University Press, vol. 11(02), pages 153-174, April.
    8. Olivier Cardi, 2007. "The Zero-root Property: Permanent vs Temporary Terms-of-trade Shocks," Review of International Economics, Wiley Blackwell, vol. 15(4), pages 782-802, September.
    9. Olivier Cardi, 2011. "Terms of Trade Shocks and the Non-Monotonic Adjustment of the Current Account," Annals of Economics and Statistics, GENES, issue 103-104, pages 195-221.
    10. Olivier Cardi & Romain Restout, 2014. "Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy," Open Economies Review, Springer, vol. 25(2), pages 373-406, April.
    11. Mansoorian, Arman & Mohsin, Mohammed, 2006. "On the employment, investment and current account effects of inflation," Journal of International Economics, Elsevier, vol. 70(1), pages 296-313, September.
    12. Jan Hanousek & Evžen Kočenda, 2011. "Foreign News and Spillovers in Emerging European Stock Markets," Review of International Economics, Wiley Blackwell, vol. 19(1), pages 170-188, February.
    13. CARDI, Oliver & BERTINELLI, Luisito, 2004. "A formal model of krugman’s intuition on the J-curve," CORE Discussion Papers 2004043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    14. Chen Fang & Po-Sheng Lin, 2013. "Traded Bond Denominations, Shock Persistence and Current Account Dynamics: Another Look at the Harberger–Laursen–Metzler Effect," Pacific Economic Review, Wiley Blackwell, vol. 18(4), pages 502-529, October.
    15. Creina Day & Garth Day, 2010. "Taxes, Growth And The Current Account Tick-Curve Effect," Australian Economic Papers, Wiley Blackwell, vol. 49(1), pages 13-27, March.
    16. Creina Day & Garth Day, 2007. "Fiscal Reform, Growth and Current Account Dynamics," ANU Working Papers in Economics and Econometrics 2007-485, Australian National University, College of Business and Economics, School of Economics.
    17. repec:ebl:ecbull:v:6:y:2008:i:45:p:1-16 is not listed on IDEAS
    18. Stefan F. Schubert & Stephen J. Turnovsky, 2006. "Anticipated Fiscal Policy Changes and Goods Market Adjustments," German Economic Review, Verein für Socialpolitik, vol. 7, pages 135-161, May.
    19. Mohsin, Mohammed & Park, Kihyun, 2015. "Monetary policy in a two-sector dependent economy," Economic Modelling, Elsevier, vol. 46(C), pages 118-129.
    20. Juan Gabriel Brida & Stefan Franz Schubert, 2008. "The Economic Effects Of Advertising On Tourism Demand," Economics Bulletin, AccessEcon, vol. 6(45), pages 1-16.
    21. Olivier Cardi & Romain Restout & Peter Claeys, 2018. "Imperfect mobility of labor across sectors and fiscal transmission," Working Papers 244952353, Lancaster University Management School, Economics Department.
    22. Schubert, Stefan Franz & Brida, Juan Gabriel, 2008. "The Dynamic Effects of Subsidizing the Tourism Sector," MPRA Paper 16755, University Library of Munich, Germany.

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