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The Dynamic Effects of Fiscal Stimulus in a Two‐Sector Open Economy
Author(s) -
Guest Ross,
Makin Anthony
Publication year - 2013
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12054
Subject(s) - stimulus (psychology) , economics , monetary economics , small open economy , debt , welfare , fiscal policy , government spending , interest rate , tax rate , overlapping generations model , open economy , macroeconomics , monetary policy , exchange rate , market economy , psychology , psychotherapist
In 2009/10 governments around the world implemented unprecedented fiscal stimulus in order to counter the impact of the G lobal F inancial C risis of 2008/09. This paper analyzes the impact of fiscal stimulus using a dynamic open economy, overlapping generations model that allows for feedback effects of fiscal stimulus on private sector expenditure via changes in the tax rate and the interest rate. There are two types of goods—traded ( T ) and nontraded ( N ) goods—which differ in their capital intensities. The main qualitative result is that the dynamic output gains from fiscal stimulus depend on the productivity of the initial stimulus spending, on the speed of repayment of debt, on the sensitivities of the interest rate to government debt and of labor supply to the tax rate. Also, the overlapping generations framework allows an intergenerational welfare analysis. Among the biggest winners from stimulus are those about to retire. The biggest losers are those near the start of their working lives when the stimulus is implemented.