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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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    References listed on IDEAS

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    Keywords

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    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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