Temporary and permanent government spending in a small open economy

Abstract

This paper studies a dynamic optimizing small open economy model that emphasizes the supply-side responses of labor and capital to changes in fiscal policy. The model used generates results that are consistent with a number of empirical regularities in small open economies. Furthermore, temporary fiscal shocks are shown to have permanent positive effects on output and negative effects on consumption and welfare. The strength of these effects are shown to depend on intertemporal elasticities of substitution and the persistence of policies.