HABIT FORMATION AND GOVERNMENT SPENDING IN A SMALL OPEN ECONOMY

2003 ◽  
Vol 7 (3) ◽  
pp. 407-423 ◽  
Author(s):  
Cem Karayalçin
Keyword(s):  
Fiscal Policy ◽  
General Equilibrium ◽  
Current Account ◽  
Open Economy ◽  
Equilibrium Model ◽  
Government Spending ◽  
Time Preference ◽  
Small Open Economy ◽  
Long Run ◽  
Fiscal Shocks

The paper studies the effects of an expansionary fiscal policy in a general equilibrium model of a small open economy. Households are assumed to possess habit-forming, endogenous rates of time preference. In response to fiscal shocks, the model generates cyclical endogenous persistence and procyclical time paths for consumption, employment, and investment, as well as a countercyclical path for the current account. Furthermore, fiscal shocks are shown to have positive long-run effects on output and negative long-run effects on consumption.

scholarly journals R&D and economic growth in Slovenia: A dynamic general equilibrium approach with endogenous growth

2011 ◽  
Vol 58 (1) ◽  
pp. 67-89 ◽  
Author(s):  
Miroslav Verbic ◽  
Boris Majcen ◽  
Olga Ivanova ◽  
Mitja Cok
Keyword(s):  
General Equilibrium ◽  
Endogenous Growth ◽  
Open Economy ◽  
Government Spending ◽  
Small Open Economy ◽  
Moderate Increase ◽  
Long Run ◽  
Tax Relief ◽  
Future Value ◽  
Policy Scenarios

In the article, we model R&D as a major endogenous growth element in a small open economy general equilibrium framework and consider several R&D policy scenarios for Slovenia. Increase of the share of sectoral investment in R&D that is deductible from the corporate income tax and increase of government spending on R&D turned out to be the most effective suggested policy measures. While the former policy measure is still followed in part by an undesired transfer of the tax relief to dividends, a moderate increase of government spending on R&D boosts long-run productivity in the economy, thus increasing the future value of firms, which is reflected in a desired dividend increase. The households that would gain more utility from such policy scenarios are those with more skilled and highly skilled labour, but not the very top earners in the economy.

scholarly journals THE TRANSITIONAL DYNAMICS OF FISCAL POLICY IN SMALL OPEN ECONOMIES

2009 ◽  
Vol 14 (1) ◽  
pp. 1-28 ◽  
Author(s):  
Ben J. Heijdra ◽  
Jenny E. Ligthart
Keyword(s):  
Fiscal Policy ◽  
Open Economy ◽  
Monopolistic Competition ◽  
Infinite Horizon ◽  
Small Open Economy ◽  
Impulse Response Functions ◽  
Lump Sum ◽  
Long Run ◽  
Goods Market ◽  
Fiscal Shocks

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.

scholarly journals Monetary-fiscal policies interactions and optimal rules in Egypt

2019 ◽  
Vol 4 (2) ◽  
pp. 138-157
Author(s):  
Sherine Al-shawarby ◽  
Mai El Mossallamy
Keyword(s):  
Fiscal Policy ◽  
Interest Rate ◽  
General Equilibrium ◽  
Open Economy ◽  
Government Spending ◽  
Small Open Economy ◽  
Policy Instruments ◽  
New Keynesian ◽  
Content Type ◽  
Monetary And Fiscal Policy

Purpose This paper aims to estimate a New Keynesian small open economy dynamic stochastic general equilibrium (DSGE) model for Egypt using Bayesian techniques and data for the period FY2004/2005:Q1-FY2015/2016:Q4 to assess monetary and fiscal policy interactions and their impact on economic stabilization. Outcomes of monetary and fiscal authority commitment to policy instruments, interest rate, government spending and taxes, are evaluated using Taylor-type and optimal simple rules. Design/methodology/approach The study extends the stylized micro-founded small open economy New Keynesian DSGE model, proposed by Lubik and Schorfheide (2007), by explicitly introducing fiscal policy behavior into the model (Fragetta and Kirsanova, 2010 and Çebi, 2011). The model is calibrated using quarterly data for Egypt on key macroeconomic variables during FY2004/2005:Q1-FY2015/2016:Q4; and Bayesian methods are used in estimation. Findings The results show that monetary and fiscal policy instruments in Egypt contribute to economic stability through their effects on inflation, output and debt stock. The monetary policy Taylor rule estimates reveal that the Central Bank of Egypt (CBE) attaches significant importance to anti-inflationary policy and (to a lesser extent) to output targeting but responds weakly to nominal exchange rate variations. CBE decisions are significantly influenced by interest rate smoothing. Egyptian fiscal policy has an important role in output and government debt stabilization. Additionally, the fiscal authority chooses pro-cyclical government spending and counter-cyclical tax policies for output stabilization. Again, past values of the fiscal instruments are influential in the evolution of the future fiscal policy-making process. Originality/value A few studies have examined the interaction between monetary and fiscal policy in Egypt within a unified framework. The presented paper integrates the monetary and fiscal policy analysis within a unified dynamic general equilibrium open economy rational expectations framework. Without such a framework, it would not be easy to jointly analyze monetary and fiscal transmission mechanisms for output, inflation and debt. Also, it would be neither possible to contrast the outcome of monetary and fiscal authorities commitment to a simple Taylor instrument rule vis-à-vis optimal policy outcomes nor to assess the behavior of monetary and fiscal agents in macroeconomic stability in context of an active/passive policy decisions framework.

scholarly journals Nonexistence of Harberger-Laursen-Metzler Effect with Endogenous Time Preference in an Imperfect Capital Market

2015 ◽  
Vol 2015 ◽  
pp. 1-10 ◽  
Author(s):  
Deng-Shan Wang ◽  
Miao Jin
Keyword(s):  
Discount Rate ◽  
Current Account ◽  
Open Economy ◽  
Capital Market ◽  
Small Open Economy ◽  
Stable State ◽  
Terms Of Trade ◽  
Stable Steady State ◽  
Long Run ◽  
Short Run

This paper investigates the spending and current-account effects of a permanent terms-of-trade change in a dynamic small open economy facing an imperfect world capital market, where the households’ subjective discount rate is a function of savings. Under the assumption that the bond holdings are measured in terms of home goods, it is shown that when the discount rate is a decreasing function of savings, there does not necessarily exist a stable state; however, when the discount rate is an increasing function of savings, a saddle-path stable steady state comes into existence and the Harberger-Laursen-Metzler effect does not exist unambiguously; that is, an unanticipated permanent terms-of-trade deterioration leads to a cut in aggregate expenditure and a current-account surplus. The short-run effects obtained by the technique by Judd (1985, 1987) and Zou (1997) are consistent with the results from the long-run analysis and diagrammatic analysis.

Government investment in a small open economy

2009 ◽  
Vol 59 (2) ◽  
pp. 119-145 ◽  
Author(s):  
K. Major ◽  
K. Szilágyi
Keyword(s):  
Open Economy ◽  
Government Spending ◽  
Small Open Economy ◽  
Infrastructure Investment ◽  
Development Programs ◽  
Public Infrastructure ◽  
Government Investment ◽  
Positive Externalities ◽  
Long Run ◽  
Lively Debate

In this article the effects of government infrastructure investment in a small open economy environment are analysed. Apart from enhancing the country’s output directly, government spending on capital — modelled here as development of public infrastructure — creates positive externalities in the production process of the private sector. Short- and long-run effects of ambitious development programs, depending on the source of financing (transfers or loans from abroad), are addressed. The empirical relevance of the quantitative conclusions to be derived from the present stylised form of the model is admittedly limited. However, the qualitative conclusions can add some new insights and contribute to the lively debate on the expected effects of government investments and EU transfers on macroeconomic development.

scholarly journals Fiscal policy in an open economy

2016 ◽  
Vol 16 (1) ◽  
Author(s):  
Amit Friedman ◽  
Zvi Hercowitz ◽  
Jonathan Sidi
Keyword(s):  
Fiscal Policy ◽  
Open Economy ◽  
Public Debt ◽  
Government Spending ◽  
Tax Rates ◽  
Productivity Shocks ◽  
Policy Regime ◽  
Domestic Production ◽  
Long Run ◽  
Macroeconomic Implications

AbstractThis paper analyzes the quantitative macroeconomic implications of a fiscal policy regime based on exogenous tax rates paths and public debt/GDP target in an open economy. In this setup, government spending accommodates tax revenues and target deficits. In particular, we concentrate on pre-announced tax cuts, as well as on the adoption of a lower debt target – following policies conducted in Israel during the 2000s. We construct a model where domestic production requires imported inputs, and simulate the effects of these policies. The analysis focuses on the dynamics generated by the announcements of these policy steps, followed by their implementation. The model has the implication that a credible announcement of a future tax cut has an expansionary effect on impact, similar in nature to the effects of productivity shocks. Also, the model implies that the announcement of a lower public debt/GDP target has a contractionary effect, while it’s implementation leads to higher output in the long-run.

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