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The multiplier in a small open economy two-agent New Keynesian model under alternative tax financing methods

Published online by Cambridge University Press:  18 July 2025

Yongseung Jung Open the ORCID record for Yongseung Jung [Opens in a new window]
Yongseung Jung*
Affiliation:
Department of Economics, Kyung Hee University, Seoul, Republic of Korea
*
Email: jungys@khu.ac.kr
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Abstract

This paper sets up a small open economy two-agent model and addresses the size of output multiplier of government spending associated with taxation either on constrained households or on unconstrained households. The paper shows that the tax financing rule matters to real resource allocations in the small open economy with flexible prices and equal tax burden at the steady state, contrasting to the finding of Monacelli and Perotti (2011) in closed economies. The output multiplier in open economies is larger than the multiplier in closed economies when taxes are levied on constrained households, while the reverse holds under taxations on unconstrained households.

Keywords

Fiscal policytaxationtwo-agentE52F31

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Type
Articles
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Macroeconomic Dynamics , Volume 29 , 2025 , e121
Copyright
© The Author(s), 2025. Published by Cambridge University Press

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