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Cyclical Government Spending, Income Inequality and Welfare in Small Open Economies

  • G. C. Lim

    ()

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Paul D. McNelis

    (Department of Finance, Graduate School of Business Administration, Fordham University)

This paper compares the effects of pro and counter-cyclical government spending on income inequality and welfare in a small open economy. We examine the consequences of alternative government spending rules following shocks to productivity, domestic interest rates, terms of trade and export demand. The simulated results show that the type of spending rule makes negligible difference to welfare, in the face of domestic or external shocks. However, pro-cyclical government spending reduces income inequality by more than counter-cyclical spending behavior across different shocks and alternative relative labour intensities.Length: 35 pages

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Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2008n18.

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Date of creation: Sep 2008
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Handle: RePEc:iae:iaewps:wp2008n18
Contact details of provider: Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
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  9. Lane, P.R. & Tornell, A., 1998. "Why Aren't Savings Rates in Latin America Procyclical?," Papers 642, Harvard - Institute for International Development.
  10. Scott Hendry & Wai-Ming Ho & Kevin Moran, 2003. "Simple Monetary Policy Rules in an Open-Economy, Limited-Participation Model," Working Papers 03-38, Bank of Canada.
  11. Cecilia García-Pe�Alosa & Stephen J. Turnovsky, 2007. "Growth, Income Inequality, and Fiscal Policy: What Are the Relevant Trade-offs?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 369-394, 03.
  12. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
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  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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