Can budget deficit reduce welfare under perfect mobility of capital? Cover Image

Czy w warunkach doskonałej mobilności kapitału deficyt budżetowy wpływa na dobrobyt?
Can budget deficit reduce welfare under perfect mobility of capital?

Author(s): Michał Konopczyński
Subject(s): Economy
Published by: Wydawnictwo Naukowe Uniwersytetu Szczecińskiego
Keywords: budget deficyt; optimal fiscal policy; perfect capital mobility

Summary/Abstract: This paper investigates the implications of the size of budget deficit in the open economy under perfect mobility of capital. For that purpose we construct a general equilibrium model with consumers maximizing the discounted utility of consumption, and firms maximizing profits. Government chooses the size of the deficit (in percentage of the GDP), and controls the structure of public debt. Using standard methods of optimal control theory we solve the model, i.e. we find explicit formulas for all trajectories and the level of welfare. Finally, we show that the higher the size of budget deficit, the lower the welfare of consumers. Similarly, welfare increases with the share of foreign debt in public debt

  • Issue Year: 2014
  • Issue No: 35/2
  • Page Range: 79-92
  • Page Count: 14
  • Language: Polish