Savers, spenders and fiscal policy in a small open economy

Arbeitspapier

This paper analyzes the effects of fiscal policy in an open economy. We extend the saversspenders theory of Mankiw (2000) to a small open economy with endogenous labor supply. We first show how the Dornbusch (1983) consumption-based real interest rate for open economies is modified when labor supply is endogenous. We then turn to the effects of fiscal policy when there are both savers and spenders. With this heterogeneity taken into account, tax cuts have a short-run contractionary effect on domestic production, and increased public spending has a short-run expansionary effect. Although consistent with recent empirical work, this result contrasts with those of most other theoretical models. Transitory changes in demand have permanent real effects in our model, and we discuss the implications for real exchange-rate dynamics. We also show how ?rational? savers may magnify or dampen the responses of ?irrational? spenders, and show how this is related to features of the utility functions.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 1618

Classification and Topics

• Classification: Wirtschaft ; Macroeconomics: Consumption; Saving; Wealth ; Open Economy Macroeconomics ; Fiscal Policy
• Subject: rule-of-thumb consumers ; fiscal policy ; open economy ; Kleines-offenes-Land ; Finanzpolitik ; Sparen ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Matsen, Egil ; Sveen, Tommy ; Torvik, Ragnar
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/19082
• Last update: 10.03.2025, 11:45 AM CET