The transitional dynamics of fiscal policy in small open economies

B.J. Heijdra, J.E. Ligthart

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We study the dynamic macroeconomic effects of fiscal shocks under lump-sum tax financing. To this end, we develop an intertemporal macroeconomic model for a small open economy, featuring monopolistic competition in the intermediate goods market, endogenous (intertemporal) labor supply, and finitely lived households. Fiscal shocks are shown to yield endogenously determined (dampened) cycles for a realistic calibration of the model. Impulse response functions of fiscal policy shocks in the finite-horizon model differ substantially from those resulting from an infinitely lived representative agent model. This can be explained by the presence of Ethier-productivity effects, which increase the size of long-run output multipliers to a greater extent in the infinite-horizon model.
Original languageEnglish
Pages (from-to)1-28
JournalMacroeconomic Dynamics
Volume14
Issue number1
Publication statusPublished - 2010

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Transitional dynamics
Small open economy
Fiscal policy
Fiscal shocks
Calibration
Financing
Multiplier
Productivity
Tax
Impulse response function
Representative agent
Intermediate goods
Monopolistic competition
Household
Labor supply
Macroeconomic impacts
Infinite horizon
Finite horizon
Macroeconomic models

Cite this

Heijdra, B. J., & Ligthart, J. E. (2010). The transitional dynamics of fiscal policy in small open economies. Macroeconomic Dynamics, 14(1), 1-28.
Heijdra, B.J. ; Ligthart, J.E. / The transitional dynamics of fiscal policy in small open economies. In: Macroeconomic Dynamics. 2010 ; Vol. 14, No. 1. pp. 1-28.
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Heijdra, BJ & Ligthart, JE 2010, 'The transitional dynamics of fiscal policy in small open economies', Macroeconomic Dynamics, vol. 14, no. 1, pp. 1-28.

The transitional dynamics of fiscal policy in small open economies. / Heijdra, B.J.; Ligthart, J.E.

In: Macroeconomic Dynamics, Vol. 14, No. 1, 2010, p. 1-28.

Research output: Contribution to journalArticleScientificpeer-review

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