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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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  1. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  2. Cecilia Garcia-Penalosa & Stephen Turnovsky, . "Growth, Income Inequality, and Fiscal Policy: What are the Relevant Tradeoffs?," Working Papers UWEC-2006-27-P, University of Washington, Department of Economics.
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  7. Juillard, Michel, 1996. "Dynare : a program for the resolution and simulation of dynamic models with forward variables through the use of a relaxation algorithm," CEPREMAP Working Papers (Couverture Orange) 9602, CEPREMAP.
  8. Jonathan Heathcote, 2003. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Working Papers gueconwpa~03-03-19, Georgetown University, Department of Economics.
  9. Turnovsky, Stephen J. & Garci­a-Peñalosa, Cecilia, 2008. "Distributional dynamics in a neoclassical growth model: The role of elastic labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1399-1431, May.
  10. John Thornton, 2008. "Explaining Procyclical Fiscal Policy in African Countries †," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 17(3), pages 451-464, June.
  11. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  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.
  13. Stein, Ernesto & Hommes, Rudolf & Hausmann, Ricardo & Alesina, Alberto, 1999. "Budget Institutions and Fiscal Performance in Latin America," Scholarly Articles 4553021, Harvard University Department of Economics.
  14. 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.
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