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Fiscal Policy and Welfare in a Small Open Economy with Imperfect Competition
Author(s) -
Santoni Michele
Publication year - 1999
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/1467-8586.00086
Subject(s) - economics , imperfect competition , small open economy , fiscal policy , fiscal multiplier , general equilibrium theory , product market , open economy , multiplier (economics) , welfare , competition (biology) , imperfect , macroeconomics , monetary economics , endogenous growth theory , microeconomics , market economy , government spending , monetary policy , ecology , linguistics , philosophy , incentive , biology , exchange rate , human capital
This paper considers the effects of fiscal policy in a two‐sector small open economy, with unionized labour markets, and heterogeneous types of imperfect competition in the product markets. By making the marginal propensity to import endogenous, the paper shows that there is no robust or general relationship between the balanced‐budget multiplier and the degree of imperfect competition. The fiscal multiplier with distortionary taxes can be positive or negative, depending on the size of the importables sector and the foreign firm’s market share. The normative rule for fiscal policy depends on the size of the fiscal multiplier. An increase in economic activity is insufficient by itself to induce the government to over‐supply public goods relative to the Walrasian case.