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Analysis of Fiscal Shocks in a Small Open Economy with Home Production

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  • Yunfang Hu
  • Kazuo Mino

Abstract

In view of the large scale of the nonmarket home sector in both developed and developing economies, in this paper we construct an open economy model with home production. We discuss both long-run and short-run impacts of fiscal policies such as income tax, consumption tax and government spending on factor allocation, capital formation and the current account. The main purpose of the paper is to elucidate the role of home production in an open economy environment. We show that in our framework both fiscal policy and the rate of substitution between market and home goods may affect the dynamic behavior of the economy. As a result, introducing home production may alter the effects of fiscal shocks on key variables in the economy. We confirm this fact by examining various policy experiments both in the short run and long run.

Suggested Citation

  • Yunfang Hu & Kazuo Mino, 2010. "Analysis of Fiscal Shocks in a Small Open Economy with Home Production," DEGIT Conference Papers c015_009, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c015_009
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    File URL: http://degit.sam.sdu.dk/papers/degit_15/c015_009.pdf
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    References listed on IDEAS

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    1. Greenwood, Jeremy & Hercowitz, Zvi, 1991. "The Allocation of Capital and Time over the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1188-1214, December.
    2. Stephen J. Turnovsky, 1997. "International Macroeconomic Dynamics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262201119, January.
    3. Andrea Raffo, 2006. "Net exports, consumption volatility, and international real business cycle models," Research Working Paper RWP 06-01, Federal Reserve Bank of Kansas City.
    4. Philip L. Brock, 1996. "International Transfers, the Relative Price on Non-Traded Goods, and the Current Account," Canadian Journal of Economics, Canadian Economics Association, vol. 29(1), pages 163-180, February.
    5. Jeffrey M. Wrase, 2001. "The interplay between home production and business activity," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 23-29.
    6. Eisner, Robert, 1988. "Extended Accounts for National Income and Product," Journal of Economic Literature, American Economic Association, vol. 26(4), pages 1611-1684, December.
    7. W. E. G. Salter, 1959. "Internal And External Balance: The Role Op Price And Expenditure Effects," The Economic Record, The Economic Society of Australia, vol. 35(71), pages 226-238, August.
    8. Yunfang Hu, 2008. "Human Capital Accumulation, Home Production And Equilibrium Dynamics," The Japanese Economic Review, Japanese Economic Association, vol. 59(3), pages 292-311.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Fiscal policy; home production; equilibrium dynamics;

    JEL classification:

    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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