Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/209843 
Year of Publication: 
2004
Series/Report no.: 
Working Paper No. 2004/18
Publisher: 
Norges Bank, Oslo
Abstract: 
This paper analyzes the effects of fiscal policy in an open economy. We extend the savers-spenders 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
E62
F41
Persistent Identifier of the first edition: 
ISBN: 
82-7553-275-2
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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