Business Cycles and Fiscal Policy in an Open Economy

University of Aarhus Dept. of Economics Working Paper No. 1998-5

34 Pages Posted: 25 Jun 1998

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Steinar Holden

University of Oslo - Department of Economics; Norges Bank; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 1998

Abstract

The role of demand management policy is considered in a two-sector open economy model with price-taking firms and imperfect competition in the labor market. Demand management policies are shown to affect the equilibrium distribution of prices and hence output in the case of both supply (productivity) and demand (preferences) shocks. As agents are risk-averse, there is a welfare case for pursuing an active stabilization policy, and the optimal fiscal policy as well as the possibility of implementing this via automatic budget rules are discussed.

JEL Classification: E32, E63, F41

Suggested Citation

Andersen, Torben M. and Holden, Steinar, Business Cycles and Fiscal Policy in an Open Economy (February 1998). University of Aarhus Dept. of Economics Working Paper No. 1998-5, Available at SSRN: https://ssrn.com/abstract=101948 or http://dx.doi.org/10.2139/ssrn.101948

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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Steinar Holden

University of Oslo - Department of Economics ( email )

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