ELASTIC CAPITAL SUPPLY AND THE EFFECTS OF FISCAL POLICY |
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| Authors: | JIM DOLMAS MARK A. WYNNE |
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| Affiliation: | Assistant Professor, Department of Economics, Southern Methodist University, Dallas Phone 1–214–768–3806, Fax 1–214–768–1821 E-mail;Senior Economist and Policy Advisor, Research Department, Federal Reserve Bank of Dallas Phone 1–214–922–5159, Fax 1–214–922–5194 E-mail |
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| Abstract: | Existing analyses of the effects of fiscal policy in general equilibrium models have typically been conducted under the assumption that the long-run supply of capital is perfectly elastic at a fixed rate of time preference. These analyses have shown that the long-run response of the capital stock to changes in fiscal policy is crucial to generating the potential for “multiplier” effects in these models. In this paper we ask, what are the implications of relaxing the assumption of perfectly elastic capital supply for the analysis of fiscal policy? We show that with less than perfectly elastic capital supply, the potential for multipliers is actually enhanced. (JEL E62, D90) |
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