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The policy (in)effectiveness of government spending in a dependent economy

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  • Anthony J. Makin

Abstract

This paper analyses the policy effectiveness of government spending in a two-sector open economy whose output and expenditure is comprised of tradables and non-tradables. This framework reveals that government spending on either tradables or, more normally, on non-tradables widens the external deficit, yet how the real exchange rate behaves depends, in the first instance, on in which sector the public spending occurs. It also shows that, irrespective of where government spending falls, there appears to be no significant short run boost to overall output and hence employment a priori, although empirically actual impact would depend on the elasticities of tradable and non-tradable output with respect to the real exchange rate. Furthermore, fiscal stimulus is shown to be unambiguously ineffective if deemed unsustainable by foreign lenders, or implemented under a fixed exchange rate regime with limited capital mobility.

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  • Anthony J. Makin, 2013. "The policy (in)effectiveness of government spending in a dependent economy," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 16(3), pages 287-301, September.
    • Handle: RePEc:taf:jecprf:v:16:y:2013:i:3:p:287-301
    DOI: 10.1080/17487870.2013.812937
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    Cited by:

    1. Olaoye, Olumide O. & Eluwole, Oluwatosin O. & Ayesha, Aziz & Afolabi, Olugbenga O., 2020. "Government spending and economic growth in ECOWAS: An asymmetric analysis," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).

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