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Government Expenditures in a Small Open Economy Model : The Role of Credit Constraint

Author

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  • Wu, Zhe

    (Monash University)

Abstract

We investigate the role of international credit market constraint in a dynamic stochastic general equilibrium model in determining the effect of government spending policies on macroeconomic variables such as consumption and the real exchange rate in a small open economy. The numerical results show that increasing government expenditure under certain economic shocks can increase the value of the real exchange rate and reduce the chance of the small open economy reaching the borrowing limit. Hence, the dynamics of consumption and the real exchange rate can be significantly affected by government spending policies under international credit market constraints.

Suggested Citation

  • Wu, Zhe, 2022. "Government Expenditures in a Small Open Economy Model : The Role of Credit Constraint," Warwick-Monash Economics Student Papers 42, Warwick Monash Economics Student Papers.
    • Handle: RePEc:wrk:wrkesp:42
    as

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    File URL: https://warwick.ac.uk/fac/soc/economics/research/wmesp/manage/42_-_zhe_wu.pdf
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    References listed on IDEAS

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    1. Alberto Alesina & Filipe R. Campante & Guido Tabellini, 2008. "Why is Fiscal Policy Often Procyclical?," Journal of the European Economic Association, MIT Press, vol. 6(5), pages 1006-1036, September.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    3. Kenneth A. Froot & Kenneth Rogoff, 1991. "The EMS, the EMU, and the Transition to a Common Currency," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 269-328, National Bureau of Economic Research, Inc.
    4. Stephanie Schmitt-Grohé & Martín Uribe, 2017. "Liquidity Traps and Jobless Recoveries," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 165-204, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Credit Constraint ; Real Exchange Rate ; Government Spending JEL Classification: F41;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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