Working Paper: NBER ID: w3489
Authors: Stephen J. Turnovsky; Partha Sen
Abstract: This paper analyzes the effects of changes in government expenditures on both a domestically produced and an imported good in an open economy based on intertemporal optimizing behavior. The dynamic adjustment is characterized in detail and the critical role played by the accumulating capital stock is highlighted. The evolution of the current account is seen to mirror that of capital. The welfare of such policies is also assessed in tans of the intertemporal utility of the representative agent. Both permanent and temporary policy changes are considered, with the latter being shown to have a permanent effect on the economy.
Keywords: Fiscal Policy; Capital Accumulation; Open Economy
JEL Codes: E62; F41; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in government expenditure on domestically produced goods (H59) | Higher domestic output (E23) |
| Higher domestic output (E23) | Higher capital accumulation (E22) |
| Higher domestic output (E23) | Improved employment levels (J68) |
| Government expenditure on imported goods (H59) | No expansionary effects on domestic output (F49) |
| Temporary fiscal shocks (E62) | Permanent effects on the economy (F69) |
| Temporary fiscal shocks (E62) | Altered steady state of the economy (E32) |
| Fiscal expansions (E62) | Changes in capital prices (G19) |
| Fiscal expansions (E62) | Wealth effects (E21) |