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Title: |
Fiscal Policy under Flexible Exchange Rates: When Is Expansion
Contractionary? |
| Author: |
Ahtiala, Pekka |
| Author
Affiliation: |
U Tampere |
| Source: |
International Economic Journal, Summer 1998, v. 12, no. 2, pp. 17-34 |
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Publication Date: |
Summer 1998 |
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Abstract: |
In this paper the behavior functions are
specified to correspond to their foundations in closed-economy
macrotheory. The demand for real money balances, in terms of the
expenditure basket of goods, is specified as a function of income in
terms of the same basket. Imports are specified as a function of
expenditures, being functionally part of expenditures. The supply of
labor is specified as a function of the expenditure price. Fiscal
expansion, while expansionary in the real wage model, turns out to be
expansionary, neutral, or contractionary in the money wage model
depending on whether the income elasticity of the demand for money is
smaller than, equal to, or greater than one, also in the long run.
However, if interest payments on foreign securities are not small
relative to the trade balance, many of the effects are reversed. Output
and the exchange rate overshoot their steady-state levels in both cases. |
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