Title Government spending effects in low-income countries / prepared by Wenyi Shen, Shu-Chun S. Yang, and Luis-Felipe Zanna

Published [Washington, D.C.] : International Monetary Fund, ©2015

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Description 1 online resource (48 pages) : color illustrations Series IMF working paper, 1018-5941 ; WP/15/286 IMF working paper ; WP/15/286. Contents Cover; Contents; I. Introduction; II. An Analytical Model; A. Model Setup; B. The Equilibrium and Some Simple Analytical Results for Multipliers; III. A Quantitative Model; A. Households; B. Firms; C. Government; D. Aggregation and Market Clearing ... ; IV. Solution and Calibration of the Quantitative Model; V. Government Consumption Effects; A. Domestic vs. External Financing Sources; B. Sensitivity on International Capital Mobility; VI. Public Investment Effects; A. Public Investment Efficiency; B. Home Bias in Public Investment ... 2; VII. Conclusion; Appendix I. Solving the Analytical ModelA. Optimality, Stead yState, and Log-linearization; B. Proofs of Propositions ... 3; References; Tables; 1. Baseline Calibration and Some Steady-State Values; 2. Cumulative multipliers for government consumption: baseline calibration.; 3. Cumulative multipliers for public investment: baseline calibration.; 4. Cumulative mul tipli ers for publi cinvestm ent: higher efficienc y; Figures; 1. Impulse responses to a government consumption increase: baseline calibration; 2. Government consumption effects under different capital mobility Summary Despite the voluminous literature on fiscal policy, very few papers focus on low-income countries (LICs). This paper develops a new-Keynesian small open economy model to show, analytically and through simulations, that some of the prevalent features of LICs---different types of financing including aid, the marginal efficiency of public investment, and the degree of home bias---play a key role in determining the effects of fiscal policy and related multipliers in these countries. External financing like aid increases the resource envelope of the economy, mitigating the private sector crowding out effects of government spending and pushing up the output multiplier. The same external financing, however, tends to appreciate the real exchange rate and as a result, traded output can respond quite negatively, reducing the overall output multiplier. Although capital scarcity implies high returns to public capital in LICs, declines in public investment efficiency can substantially dampen the output multiplier. Since LICs often import substantial amounts of goods, public investment may not be as effective in stimulating domestic production in the short run.--Abstract Notes "December 2015." "Institute for Capacity Development, Research Department and Strategy, Policy, and Review Department." Bibliography Includes bibliographical references (pages 43-47) Notes Online resource; title from pdf title page (IMF.org Web site, viewed January 4, 2016) Subject Fiscal policy -- Developing countries -- Econometric models National income -- Developing countries -- Econometric models Expenditures, Public -- Econometric models Government spending policy -- Developing countries -- Econometric models Public investments -- Developing countries -- Econometric models Expenditures, Public -- Econometric models Fiscal policy -- Econometric models Government spending policy -- Econometric models National income -- Econometric models Public investments -- Econometric models Developing countries Form Electronic book Author Yang, Shu-Chun Susan, 1971- (IMFstaff), author. Zanna, Luis-Felipe, (IMFstaff), author International Monetary Fund. Institute for Capacity Development. International Monetary Fund. Research Department. International Monetary Fund. Strategy, Policy, and Review Department. ISBN 1513578979 9781513578972 1513506749 9781513506746 1513521462 9781513521466

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