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Fiscal Policy, Capital Accumulation, and Debt in an Open Economy

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  • Stephen J. Turnovsky
  • Partha Sen

Abstract

This paper analyzes the effects of changes in government expenditures on both a domestically produced and an imported good in an open economy based on intertemporal optimizing behavior. The dynamic adjustment is characterized in detail and the critical role played by the accumulating capital stock is highlighted. The evolution of the current account is seen to mirror that of capital. The welfare of such policies is also assessed in tans of the intertemporal utility of the representative agent. Both permanent and temporary policy changes are considered, with the latter being shown to have a permanent effect on the economy.

Suggested Citation

  • Stephen J. Turnovsky & Partha Sen, 1990. "Fiscal Policy, Capital Accumulation, and Debt in an Open Economy," NBER Working Papers 3489, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3489
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    References listed on IDEAS

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    1. J. P. Gould, 1968. "Adjustment Costs in the Theory of Investment of the Firm," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 35(1), pages 47-55.
    2. Sen, Partha & Turnovsky, Stephen J, 1989. "Tariffs, Capital Accumulation, and the Current Account in a Small Open Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 811-831, November.
    3. Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Hysteresis in unemployment," European Economic Review, Elsevier, vol. 31(1-2), pages 288-295.
    4. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75(4), pages 321-321.
    5. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
    6. Brock, Philip L., 1988. "Investment, the current account, and the relative price of non-traded goods in a small open economy," Journal of International Economics, Elsevier, vol. 24(3-4), pages 235-253, May.
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