Resource title

Savers, spenders and fiscal policy in a small open economy

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Resource description

This paper analyzes the effects of fiscal policy in an open economy. We extend the saversspenders theory of Mankiw (2000) to a small open economy with endogenous labor supply. We first show how the Dornbusch (1983) consumption-based real interest rate for open economies is modified when labor supply is endogenous. We then turn to the effects of fiscal policy when there are both savers and spenders. With this heterogeneity taken into account, tax cuts have a short-run contractionary effect on domestic production, and increased public spending has a short-run expansionary effect. Although consistent with recent empirical work, this result contrasts with those of most other theoretical models. Transitory changes in demand have permanent real effects in our model, and we discuss the implications for real exchange-rate dynamics. We also show how ?rational? savers may magnify or dampen the responses of ?irrational? spenders, and show how this is related to features of the utility functions.

Resource author

Egil Matsen, Tommy Sveen, Ragnar Torvik

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/19082

Resource license

Adapt according to the presented license agreement and reference the original author.