The first part of this paper revises and extends Sauernheimer's model by considering the stock-flow interaction between the net foreign assets and the current account beyond the short run, and residents who demand real instead of nominal foreign assets. It is found that an expansionary fiscal policy may or may not raise output in the long run, but it will raise output if and only if it lowers the igterest rate and the price level. The second part of this paper further considers lagged price adjustment in the output market. It is found that the effect of expansionary fiscal policy on output is again ambiguous; however, if price in the output market adjusts with enough speed, stability requires that the effect be negative.
ASJC Scopus subject areas
- Economics and Econometrics