The Effects of Government Spending under Limited Capital Mobility

 
Author/Editor: Shen, Wenyi ; Yang, Shu-Chun S.
 
Publication Date: May 01, 2012
 
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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(s): Budget deficits | Developing countries | Economic models | External borrowing | Fiscal policy | Government expenditures | Monetary policy | Reserve management policy

Author's Keyword(s): Fiscal policy | fiscal multipliers | small-open DSGE models | developing countries | imperfect capital mobility
 
English
Publication Date: May 01, 2012
Format: Paper
Stock No: WPIEA2012129 Pages: 40
Price:
US$18.00 (Academic Rate:
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