The Dynamic Effects of Fiscal Stimulus in a Two‐Sector Open Economy

18 Pages Posted: 18 Jul 2013

See all articles by Ross S. Guest

Ross S. Guest

Griffith University - School of Accounting and Finance - Gold Coast Campus

Anthony J. Makin

Griffith University - Griffith Business School

Date Written: August 2013

Abstract

In 2009/10 governments around the world implemented unprecedented fiscal stimulus in order to counter the impact of the Global Financial Crisis 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.

Suggested Citation

Guest, Ross and Makin, Anthony J., The Dynamic Effects of Fiscal Stimulus in a Two‐Sector Open Economy (August 2013). Review of Development Economics - Special Issue. Guest Editor: Zhihao Yu, Vol. 17, Issue 3, pp. 609-626, 2013. Available at SSRN: https://ssrn.com/abstract=2295287 or http://dx.doi.org/10.1111/rode.12054

Ross Guest (Contact Author)

Griffith University - School of Accounting and Finance - Gold Coast Campus ( email )

PMB 50 Gold Coast Mail Centre
9726 Queensland
Australia

Anthony J. Makin

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia

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