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Fiscal Policy in an Imperfectly Competitive Dynamic Small Open Economy

Listed author(s):
  • Javier Coto-Martinez
  • Huw Dixon

In this paper we develop a general model of an imperfectly competitive small open economy. There is a traded and non-traded sector, whose outputs are combined in order to produce a single final good that can be either consumed or invested. We make general assumptions about preferences and technology, and analyse the impact of fiscal policy on the economy. We find that the fiscal mutiplier is between zero and one, and provide sufficient conditions for it to be increasing in the degree of imperfect competition. We also are able to compare the multiplier under free-entry and with a fixed number of firms, the speed of convergence to equilibrium and welfare. A simple graphical representation of the model is developed.

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File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/1999/9919.pdf
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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 99/19.

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Handle: RePEc:yor:yorken:99/19
Contact details of provider: Postal:
Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom

Phone: (0)1904 323776
Web page: https://www.york.ac.uk/economics/
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  1. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-137, February.
  2. Serven, Luis, 1994. "Capital goods imports, the real exchange rate, and the current account," Policy Research Working Paper Series 1298, The World Bank.
  3. Turnovsky, Stephen J., 1991. "Tariffs and sectoral adjustments in an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(1), pages 53-89.
  4. Sen, Partha & Turnovsky, Stephen J., 1989. "Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect," Journal of International Economics, Elsevier, vol. 26(3-4), pages 227-250, May.
  5. Maurice Obstfeld & Kenneth Rogoff, 1994. "The Intertemporal Approach to the Current Account," NBER Working Papers 4893, National Bureau of Economic Research, Inc.
  6. Heijdra, Ben J, 1998. "Fiscal Policy Multipliers: The Role of Monopolistic Competition, Scale Economies, and Intertemporal Substitution in Labour Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 659-696, August.
  7. Turnovsky, S. & Sen, P., 1988. "Deterioration Of The Term Of Trade And Capital Eccumulation A Reexamination Of The Laursen-Metzler Effect," Discussion Papers in Economics at the University of Washington 88-08, Department of Economics at the University of Washington.
  8. Maurice Obstfeld, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, Oxford University Press, vol. 97(2), pages 251-270.
  9. Philip L. Brock & Stephen J. Turnovsky, 1993. "The Dependent Economy Model with Both Traded and Non-Traded Capital Goods," NBER Working Papers 4500, National Bureau of Economic Research, Inc.
  10. Sorensen, Jan Rose, 1996. " Coordination of Fiscal Policy among a Subset of Countries," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(1), pages 111-118, March.
  11. Partha Sen & Stephen J. Turnovsky, 1990. "Investment Tax Credit in an Open Economy," NBER Working Papers 3298, National Bureau of Economic Research, Inc.
  12. Dixon, Huw & Lawler, Phillip, 1996. " Imperfect Competition and the Fiscal Multiplier," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 219-231, June.
  13. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International Business Cycles: Theory and Evidence," Working Papers 93-21, New York University, Leonard N. Stern School of Business, Department of Economics.
  14. 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.
  15. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
  16. Dixon, Huw David, 1990. "Macroeconomic Policy with a Floating Exchange Rate and a Unionised Non-traded Sector," Economic Journal, Royal Economic Society, vol. 100(400), pages 78-90, Supplemen.
  17. Obstfeld, Maurice, 1989. "Fiscal deficits and relative prices in a growing world economy," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 461-484, May.
  18. van Wincoop, Eric, 1993. "Structural adjustment and the construction sector," European Economic Review, Elsevier, vol. 37(1), pages 177-201, January.
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