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Title:Savers, spenders and fiscal policy in a small open economy PDF Logo
Authors:Matsen, Egil
Sveen, Tommy
Torvik, Ragnar
Issue Date:2005
Series/Report no.:CESifo working papers 1618
Abstract: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.
Subjects:rule-of-thumb consumers
fiscal policy
open economy
JEL:E21
F41
E62
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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