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Title: Subsidies as optimal fiscal stimuli
Authors: Molana, H.
Montagna, C.
Kwan, C.Y. 
Keywords: Fiscal policy
International trade
Monopolistic competition
Nash equilibrium
Policy coordination
Issue Date: Dec-2012
Citation: Molana, H., Montagna, C., Kwan, C.Y. (2012-12). Subsidies as optimal fiscal stimuli. Bulletin of Economic Research 64 (SUPPL.1) : s149-s167. ScholarBank@NUS Repository.
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. © 2012 The Authors. Bulletin of Economic Research © 2012 Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research.
Source Title: Bulletin of Economic Research
ISSN: 03073378
DOI: 10.1111/j.1467-8586.2012.00460.x
Appears in Collections:Staff Publications

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