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Savers, Spenders and Fiscal Policy in a Small Open Economy

Author

Listed:
  • Matsen Egil

    (Norwegian University of Science and Technology)

  • Sveen Tommy

    (Norges Bank)

  • Torvik Ragnar

    (Norwegian University of Science and Technology)

Abstract

This paper extends the savers-spenders theory of Mankiw (2000) to analyze fiscal policy in a small open economy with endogenous labor supply. It is first shown that tax cuts have a short-run contractionary effect on domestic production, and increased public spending has a short-run expansionary effect. Although consistent with recent empirical work, this result contrasts with those of most other theoretical models. Transitory changes in demand have permanent real effects in our model, and we discuss the implications for real exchange rate dynamics. We also show how ``rational" agents may magnify or dampen the responses of ``irrational" agents, and discuss how, unlike in previous contributions, this is in our model purely a result of the shape of rational agents' utility functions.

Suggested Citation

  • Matsen Egil & Sveen Tommy & Torvik Ragnar, 2007. "Savers, Spenders and Fiscal Policy in a Small Open Economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
    • Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:22
    DOI: 10.2202/1935-1690.1529
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    Cited by:

    1. Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 37-54.
    2. Dirk Niepelt, 2009. "Sovereign Debt Maturity without Commitment," 2009 Meeting Papers 231, Society for Economic Dynamics.
    3. Harris Dellas & Dirk Niepelt, 2021. "Austerity," The Economic Journal, Royal Economic Society, vol. 131(634), pages 697-712.
    4. Harris Dellas & Dirk Niepelt, 2013. "Credibility For Sale," Working Papers 13.05, Swiss National Bank, Study Center Gerzensee.
    5. Heijdra, Ben J. & Ligthart, Jenny E., 2010. "The Transitional Dynamics Of Fiscal Policy In Small Open Economies," Macroeconomic Dynamics, Cambridge University Press, vol. 14(1), pages 1-28, February.
    6. repec:dau:papers:123456789/179 is not listed on IDEAS
    7. Gábor P. Kiss, 2007. "One-off and off-budget items: An alternative approach," MNB Conference Volume, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 1(1), pages 18-27, December.

    More about this item

    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - 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; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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