Government Spending and Cyclical Adjustment in a Small Open Economy

Government Spending and Cyclical Adjustment in a Small Open Economy

The paper studies the effects of expansionary fiscal policy in a general equilibrium model of a small open economy with a recursive time preference structure in which the intertemporal optimizing behavior of infinitely-lived agents endogenously determines employment, investment, and the current account. It is shown that the adjustment to the steady state may be cyclical and the long-run government spending multiplier may exceed one.

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