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dc.contributor.authorMolana, Hassan
dc.contributor.authorMontagna, Catia
dc.contributor.authorKwan, Chang Yee
dc.description.abstractIn the theoretical macroeconomics literature, fiscal policy is almost uniformly taken to mean taxing and spending by a ‘benevolent government’ that exploits the 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 hence typically reduce welfare. In this paper we consider the use of ‘tax-and-subsidise’ instead of ‘taxand- spend’ policies on account of their widespread use by governments, even in the recent recession, to stimulate economic activity. Within a static general equilibrium macro-model with imperfectly competitive good markets we examine the effect of wage and output subsidies and show that, for a small open economy, positive tax and subsidy rates exist which maximise welfare, rendering no intervention as a suboptimal state. 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 trading partners in setting these rates is more expansionary and leads to an improvement upon the non-cooperative solution.en_US
dc.publisherUniversity of Dundeeen_US
dc.relation.ispartofseriesSIRE DISCUSSION PAPER;SIRE-DP-2010-96
dc.subjectfiscal policyen_US
dc.subjectinternational tradeen_US
dc.subjectmonopolistic competitionen_US
dc.subjectNash equilibriumen_US
dc.subjectpolicy coordinationen_US
dc.titleSubsidies as Optimal Fiscal Stimulien_US
dc.typeWorking Paperen_US

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