Fiscal policy in classical and Keynesian open economies
The authors analyze the impact of fiscal policy changes in openeconomies, using a rational expectation framework that nests two prototype economies: a neoclassical full-employment benchmark economy, with intertemporally optimizing consumers and firms and instant clearing of asset, goods, and factor markets; and a Keynesian economy, with liquidity constraints and wage rigidity, which results in transitory deviations from full employment. The model is forward-looking in that the economy's short-run equilibrium depends on current and anticipated future values of all exogenous variables, and displays hysteresis (that is, its long-run equilibrium is path-dependent). Using parameters for a representative open economy, the model is simulated to compare the dynamic effects of increases in public spending financed by taxation, debt, and money. The results illustrate four points. Both permanent and transitory disturbances cause changes in long-run output and capacity. Transitory and permanent shocks may have opposite effects on the current account. Liquidity constraints and wage rigidities tend to amplify the cyclical adjustment to fiscal policy changes. The Keynesian economy's response to fiscal shocks depends critically on the way the budget is financed: money-financed fiscal expansion causes real depreciation; non-money-financed fiscal expansion causes appreciation.
|Date of creation:||31 May 1994|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995.
"Money Demand and Seigniorage-Maximizing Inflation,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 27(2), pages 583-603, May.
- Easterly, William & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1992. "Money demand and seignorage - maximizing inflation," Policy Research Working Paper Series 1049, The World Bank.
- Turnovsky, S.J. & Sen, P., 1990.
"Fiscal Policy, Capital Accumulation, And Debt In An Open Economy,"
90-18, University of Washington, Department of Economics.
- Turnovsky, Stephen J & Sen, Partha, 1991. "Fiscal Policy, Capital Accumulation, and Debt in an Open Economy," Oxford Economic Papers, Oxford University Press, vol. 43(1), pages 1-24, January.
- Stephen J. Turnovsky & Partha Sen, 1990. "Fiscal Policy, Capital Accumulation, and Debt in an Open Economy," NBER Working Papers 3489, National Bureau of Economic Research, Inc.
- Turnovsky, S.J. & Sen, P., 1990. "Fiscal Policy, Capital Accumulation, And Debt In An Open Economy," Discussion Papers in Economics at the University of Washington 90-18, Department of Economics at the University of Washington.
- Barro, Robert J., 1974.
"Are Government Bonds Net Wealth?,"
3451399, Harvard University Department of Economics.
- B. Douglas Bernheim, 1987.
"Ricardian Equivalence: An Evaluation of Theory and Evidence,"
in: NBER Macroeconomics Annual 1987, Volume 2, pages 263-316
National Bureau of Economic Research, Inc.
- B. Douglas Bernheim, 1988. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Working Papers 2330, National Bureau of Economic Research, Inc.
- Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
- Francesco Giavazzi & Charles Wyplosz, 1984.
"The Real Exchange Rate, the Current Account, and the Speed of Adjustment,"
in: Exchange Rate Theory and Practice, pages 335-356
National Bureau of Economic Research, Inc.
- Francesco Giavazzi & Wyplosz, . "The Real Exchange Rate, the Current Account and the Speed of Adjustment," Rodney L. White Center for Financial Research Working Papers 13-82, Wharton School Rodney L. White Center for Financial Research.
- Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1299. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.