The Effects of Government Spending under Limited Capital Mobility

Working Paper No. 12/129

This paper studies the effects of government spending under limited international capital mobility, as featured by most developing countries. While external financing of government debt mitigates the crowding-out effect, it generates real appreciation, which contracts traded output and lowers the fiscal multiplier in the short run. The decline of the multiplier is larger when facing debt-elastic country risk premia. Also, government spending is more expansionary with more home bias in government purchases, more sectoral rigidities, and a less flexible exchange rate. Whether the twin-deficit hypothesis holds depends crucially on the extent to which government deficits are financed externally.
Publication date: May 2012
ISBN: 9781475503661
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Topics covered in this book

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Economics- Macroeconomics , Economics / General , International - Economics , Fiscal Policy , Fiscal Multipliers , Small-open Dsge Models , Developing Countries , Imperfect Capital Mobility , Budget Deficits , Economic Models , External Borrowing , Government Expenditures , Reserve Management Policy

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