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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Lambertini, Luisa / Nimark, Kristoffer / Wang, Pengfei

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IMPACT FACTOR 2017: 0.378
5-year IMPACT FACTOR: 0.462

CiteScore 2017: 0.62

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Source Normalized Impact per Paper (SNIP) 2017: 0.605

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1935-1690
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Savers, Spenders and Fiscal Policy in a Small Open Economy

Egil Matsen / Tommy Sveen / Ragnar Torvik
Published Online: 2007-08-07 | DOI: https://doi.org/10.2202/1935-1690.1529

This paper extends the savers-spenders theory of Mankiw (2000) to analyze fiscal policy in a small open economy with endogenous labor supply. It is first shown that 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" agents may magnify or dampen the responses of ``irrational" agents, and discuss how, unlike in previous contributions, this is in our model purely a result of the shape of rational agents' utility functions.

Keywords: rule-of-thumb consumers; fiscal policy; open economy

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Published Online: 2007-08-07


Citation Information: The B.E. Journal of Macroeconomics, Volume 7, Issue 1, ISSN (Online) 1935-1690, DOI: https://doi.org/10.2202/1935-1690.1529.

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