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Can Fiscal Spending Be Contractionary in the Neoclassical Economy?

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  • Chao, Chi-Chur
  • Yu, Eden S H

Abstract

Utilizing a two-sector, general equilibrium model with variable returns-to-scale technology, the authors examine the effects of fiscal spending on the goods-price ratio, private income, government income, and national income in a neoclassical economy. The fiscal policy is contractionary when the unfavorable price-induced production effect via a smaller elasticity of the returns to scale outweighs the gain from the private appreciation of government spending. With identical (or constant) returns to scale and zero appreciation of government spending, fiscal policy is ineffective. Copyright 1993 by The London School of Economics and Political Science.

Suggested Citation

  • Chao, Chi-Chur & Yu, Eden S H, 1993. "Can Fiscal Spending Be Contractionary in the Neoclassical Economy?," Economica, London School of Economics and Political Science, vol. 60(239), pages 347-356, August.
    • Handle: RePEc:bla:econom:v:60:y:1993:i:239:p:347-56
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    Cited by:

    1. Fung, Michael Ka-Yiu, 1996. "Who pays for fiscal expansion? Distributional effects of fiscal spending in a small open economy with foreign capital," Journal of Macroeconomics, Elsevier, vol. 18(4), pages 715-726.
    2. Fabio Antoniou & Panos Hatzipanayotou & Nikos Tsakiris, 2019. "Destination‐based vs. Origin‐based Commodity Taxation in Large Open Economies with Unemployment," Economica, London School of Economics and Political Science, vol. 86(341), pages 67-86, January.
    3. Chi‐Chur Chao & Eden S. H. Yu, 1997. "International Capital Competition and Environmental Standards," Southern Economic Journal, John Wiley & Sons, vol. 64(2), pages 531-541, October.

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