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Can Fiscal Policy Improve Welfare in a Small Dependent Economy with Feedback Effects?
Author(s) -
Costa Luís
Publication year - 2001
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00256
Subject(s) - economics , welfare , monetary economics , small open economy , fiscal policy , capital (architecture) , general equilibrium theory , macroeconomics , exchange rate , capital good , economy , goods and services , market economy , archaeology , history
I develop an intertemporal general equilibrium two‐sector model for a small dependent economy. Firms in the non‐tradable‐good sector are assumed to be large, both at the industry and the economy levels, and to compete over quantities. The exchange rate is fixed and financial capital is perfectly mobile. I study the effects of government purchases of goods on the macroeconomic short‐ and long‐run equilibria when entry is possible. Sufficient conditions for welfare improvement are also derived.