The Effects of Government Spending Under Limited Capital Mobility

Author/Editor:

Wenyi Shen ; Susan S. Yang

Publication Date:

May 1, 2012

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper studies the effects of government spending under limited international capital mobility, as featured by most developing countries. While external financing of government debt mitigates the crowding-out effect, it generates real appreciation, which contracts traded output and lowers the fiscal multiplier in the short run. The decline of the multiplier is larger when facing debt-elastic country risk premia. Also, government spending is more expansionary with more home bias in government purchases, more sectoral rigidities, and a less flexible exchange rate. Whether the twin-deficit hypothesis holds depends crucially on the extent to which government deficits are financed externally.

Series:

Working Paper No. 12/129

Subject:

English

Publication Date:

May 1, 2012

ISBN/ISSN:

9781475503661/1018-5941

Stock No:

WPIEA2012129

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

41

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