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Borrow and Adjust. Fiscal Policy and Sectoral Adjustment in an Open Economy

  • Steigum, E.
  • Thogersen, O.

Should the government run fiscal deficits in response to an adverse external shock that reduces national income permanently, warranting transfer of resources from production of non-traded to traded goods? This paper considers fiscal policy implications of sectoral adjustment costs in a model with non-Ricardian concumers. We show that even in the absence of nominal rigidities, temporary fiscal deficits increase social welfare if sectoral adjustment costs prevent immediate adjustment. If there are no adjustment costs, the case for fiscal deficits vanishes.

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Paper provided by Norwegian School of Economics and Business Administration- in its series Papers with number 28/98.

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Length: 29 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:fth:norgee:28/98
Contact details of provider: Postal: NORWEGIAN SCHOOL OF ECONOMICS AND BUSINESS ADMINISTRATION, HELLEVEIEN 30, 5035 BERGEN SANDVIKEN NORWAY.
Phone: 5595 9000
Fax: 5595 9100
Web page: http://www.nhh.no/
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  1. Buiter, Willem H, 1988. "Structural and Stabilization Aspects of Fiscal and Financial Policy in the Dependent Economy," Oxford Economic Papers, Oxford University Press, vol. 40(2), pages 220-45, June.
  2. Davis, Steven J. & Haltiwanger, John, 1999. "Gross job flows," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 41, pages 2711-2805 Elsevier.
  3. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  4. Gregory W. Huffman & Mark A. Wynne, 1995. "The role of intratemporal adjustment costs in a multi-sector economy," Working Papers 9508, Federal Reserve Bank of Dallas.
  5. Collier, Paul & Gunning, Jan & Associates,, 1999. "Volume I: Africa," OUP Catalogue, Oxford University Press, number 9780198293385, March.
  6. Gavin, Michael, 1990. "Structural adjustment to a terms of trade disturbance : The role of relative prices," Journal of International Economics, Elsevier, vol. 28(3-4), pages 217-243, May.
  7. Jeremy Greenwood & Glenn M. MacDonald & Guang-Jia Zhang, 1994. "The cyclical behavior of job creation and job destruction: a sectoral model," Discussion Paper / Institute for Empirical Macroeconomics 88, Federal Reserve Bank of Minneapolis.
  8. Aghion, P. & Blanchard, O.J., 1993. "On the Speed of Transition in Central Europe," Working papers 93-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Andrew Atkeson & Patrick J. Kehoe, 1995. "Social insurance and transition," Staff Report 202, Federal Reserve Bank of Minneapolis.
  10. Neary, J Peter, 1978. "Short-Run Capital Specificity and the Pure Theory of International Trade," Economic Journal, Royal Economic Society, vol. 88(351), pages 488-510, September.
  11. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  12. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989. "Building Blocks of Market Clearing Business Cycle Models," NBER Working Papers 3004, National Bureau of Economic Research, Inc.
  13. Karp, Larry & Paul, Thierry, 1994. "Phasing In and Phasing Out Protectionism with Costly Adjustment of Labour," Economic Journal, Royal Economic Society, vol. 104(427), pages 1379-92, November.
  14. Dixit, Avinash, 1989. "Intersectoral capital reallocation under price uncertainty," Journal of International Economics, Elsevier, vol. 26(3-4), pages 309-325, May.
  15. Gavin, Michael, 1991. "Income effects of adjustment to a terms of trade disturbance and the demand for adjustment finance," Journal of Development Economics, Elsevier, vol. 37(1-2), pages 127-153, November.
  16. Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-32, March.
  17. Murphy, Robert G., 1988. "Sector-specific capital and real exchange rate dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 12(1), pages 7-12, March.
  18. Maurice Obstfeld, 1988. "Fiscal Deficits and Relative Prices in a Growing World Economy," NBER Working Papers 2725, National Bureau of Economic Research, Inc.
  19. Philippe Aghion & Olivier Jean Blanchard, 1994. "On the Speed of Transition Central Europe," NBER Working Papers 4736, National Bureau of Economic Research, Inc.
  20. Steigum, Erling Jr., 1984. "Intersectoral transfer of labour in a small open economy," European Economic Review, Elsevier, vol. 24(2), pages 225-237, March.
  21. Steigum, Jr.E., 1989. "Wealth, Structural Adjustment And Optimal Recovery From The Dutch Disease," Papers 06-89, Norwegian School of Economics and Business Administration-.
  22. Mussa, Michael, 1978. "Dynamic Adjustment in the Heckscher-Ohlin-Samuelson Model," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 775-91, October.
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