Abstract
Theoretical macroeconomic models typically take fiscal policy to mean tax-and-spend by a benevolent government that exploits potential aggregate demand externalities inherent in the imperfectly competitive nature of goods markets. Whilst shown to raise aggregate output and employment, these policies crowd-out private consumption and typically reduce welfare. On account of their widespread use to stimulate economic activity, we consider the use of tax-and-subsidize instead of tax-and-spend policies. Within a static general equilibrium macro-model with imperfectly competitive goods markets, we examine the effects of wage and output subsidies and show that, for a small open economy, positive tax and subsidy rates exist which maximize welfare, rendering no intervention suboptimal. We also show that, within a two-country setting, a Nash non-cooperative symmetric equilibrium with positive tax and subsidy rates exists, and that cooperation between governments in setting these rates is more expansionary and leads to an improvement upon the non-cooperative solution.
Original language | English |
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Pages (from-to) | s149-s167 |
Number of pages | 19 |
Journal | Bulletin of Economic Research |
Volume | 64 |
Issue number | s1 |
Early online date | 3 Jul 2012 |
DOIs | |
Publication status | Published - Dec 2012 |