The Effects of Government Spending Under Limited Capital Mobility
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
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. 2012/129
Subject:
Balance of payments Capital account Consumption Expenditure Fiscal multipliers Fiscal policy Foreign exchange National accounts Public debt Real exchange rates
English
Publication Date:
May 1, 2012
ISBN/ISSN:
9781475503661/1018-5941
Stock No:
WPIEA2012129
Pages:
41
Please address any questions about this title to publications@imf.org