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Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model

  • Olivier Cardi

    ()

    (ERMES, Universit¶e Panth¶eon-Assas Paris 2, IRES, Universit¶e catholique de Louvain)

  • Romain Restout

    ()

    (University Paris X - Nanterre, and GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard)

This contribution shows that the duration of a fisscal shock together with sectoral capital intensity matter in determining the dynamic and steady-state effects in an intertemporal-optimizing two-sector small open economy model. First, unlike a permanent shock, net foreign asset position always worsens in the long-run after a transitory fiscal expansion. Second, steady-state changes in physical capital depend on sectoral capital-labor ratios but their signs may be reversed compared to the corresponding permanent public policy. Third, investment and the current account may now adjust non monotonically. Fourth, a temporary fiscal shock always crowds-out (crowds-in) investment in the long-run whenever the non traded (traded) sector is more capital intensive.

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Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0720.

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Length: 74 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:gat:wpaper:0720
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  1. Vikas Kakkar, 2003. "The Relative Price of Nontraded Goods and Sectoral Total Factor Productivity: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 444-452, May.
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  13. Alan C. Stockman & Linda L. Tesar, 1990. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
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