Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model

Olivier Cardi (1) , Romain Restout (2)

1 ERMES - Equipe de recherche sur les marches, l'emploi et la simulation
2 GATE - Groupe d'analyse et de théorie économique

This contribution shows that the duration of a fisscal shock together with sectoral capital intensity matter in determining the dynamic and steady-state effects in an intertemporal-optimizing two-sector small open economy model. First, unlike a permanent shock, net foreign asset position always worsens in the long-run after a transitory fiscal expansion. Second, steady-state changes in physical capital depend on sectoral capital-labor ratios but their signs may be reversed compared to the corresponding permanent public policy. Third, investment and the current account may now adjust non monotonically. Fourth, a temporary fiscal shock always crowds-out (crowds-in) investment in the long-run whenever the non traded (traded) sector is more capital intensive.

Mots clés: current account; government spending; nontraded goods; temporary shocks

Domaines: Economies et finances

Olivier Cardi, Romain Restout. Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model. 2007. ⟨halshs-00174574⟩