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Fiscal Policy in an Imperfectly Competitive Dynamic Small Open Economy

  • 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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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
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  1. 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.
  2. Turnovsky, S.J. & Sen, P., 1990. "Fiscal Policy, Capital Accumulation, And Debt In An Open Economy," Working Papers 90-18, University of Washington, Department of Economics.
  3. Turnovsky, S.J., 1990. "Tariffs And Sectoral Adjustments In An Open Economy," Discussion Papers in Economics at the University of Washington 90-13, Department of Economics at the University of Washington.
  4. 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.
  5. Sen, Partha & Turnovsky, Stephen J., 1990. "Investment tax credit in an open economy," Journal of Public Economics, Elsevier, vol. 42(3), pages 277-299, August.
  6. Dixon, Huw & Lawler, Phillip, 1996. " Imperfect Competition and the Fiscal Multiplier," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 219-31, June.
  7. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  8. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier.
  9. Turnovsky, S. & Sen, P., 1988. "Deterioration Of The Term Of Trade And Capital Eccumulation A Reexamination Of The Laursen-Metzler Effect," Working Papers 88-08, University of Washington, Department of Economics.
  10. Sorensen, Jan Rose, 1996. " Coordination of Fiscal Policy among a Subset of Countries," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(1), pages 111-18, March.
  11. Obstfeld, Maurice, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 251-70, May.
  12. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International Business Cycles: Theory and Evidence," NBER Working Papers 4493, National Bureau of Economic Research, Inc.
  13. Serven, Luis, 1994. "Capital goods imports, the real exchange rate, and the current account," Policy Research Working Paper Series 1298, The World Bank.
  14. Maurice Obstfeld, 1988. "Fiscal Deficits and Relative Prices in a Growing World Economy," NBER Working Papers 2725, National Bureau of Economic Research, Inc.
  15. van Wincoop, Eric, 1993. "Structural adjustment and the construction sector," European Economic Review, Elsevier, vol. 37(1), pages 177-201, January.
  16. 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 659-96, August.
  17. 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 101-37, February.
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