Can fiscal improve welfare in a small open economy?

• Autor(a) principal: Costa, Luís F.
• Data de Publicação: 1998
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.5/22724
• topic: Small Open Economy; Cournot Oligopoly; Fiscal Policy

In the last decade the analysis of open economy macroeconomics shifted from a static framework to an intertemporal one. Simultaneously, macroeconomic models have increasingly incorporated imperfectly competitive structures in order to by-pass the limitations of the walrasian framework. Our model combines both features following the Obstfeld and Rogoff (1995) and Sutherland (1996) papers. However, instead of considering monopolistically competitive markets as in the Dixit and Stiglitz (1977) and Blanchard and Kiyotaki (1987) tradition, we assume size to be an important issue both at the industry and at the economy level as in d'Aspremont et al. (1989). Therefore, the mark-up is endogenous introducing an extra transmission mechanism for fiscal policy. Fiscal policy is shown to be effective on the aggregate output level, both in the short and the long runs. Allowing for entry intensifies the positive effect on aggregate output and lessens the negative effect on welfare. In fact, with entry it is possible to reach a new steady state which Pareto dominates the initial one.