General equilibrium impacts of monetary and fiscal policies on welfare of households in South Asia

Bhattarai, Keshab

Abstract

Impacts of fiscal and monetary policies are assessed in an open economy two sector multi-household general equilibrium tax model with money for South Asia. Despite impressive growth rates there is evidence for alarming gaps in the distribution of income among households that require very careful design of economic policies. Generally the impacts of fiscal expansions are positive for all categories of households under the flexible price system but the gains are much higher for households in the upper income group than for those in the bottom. In theory the equilibrium relative prices guarantee the optimal allocation of resources in such economy. Simulation results show that demand, output and employment are sensitive to the preferences of consumers, confidence of producers and sector specific production technologies. Monetary policy is super-neutral under flexible price regime but can complement fiscal policy well when aggregate prices are made sticky. Combination of monetary and fiscal policies in this manner can have extensive impacts in efficiency and redistribution. Higher taxes distort incentives to work and investment from richer households slowing down the economy. This reduces the welfare level of both rich and poor. Flexibility in prices enhances the market mechanism and makes the fiscal policy more effective and efficient. © 2011 Blackwell Publishing Ltd.

Citation

Bhattarai, K. (2011). General equilibrium impacts of monetary and fiscal policies on welfare of households in South Asia. Review of development economics, 15(4), 745-757. https://doi.org/10.1111/j.1467-9361.2011.00640.x

• Journal Article Type: Article
• Acceptance Date: Jan 1, 2011
• Online Publication Date: Oct 24, 2011
• Publication Date: 2011-11
• Deposit Date: Nov 13, 2014
• Journal: Review Of Development Economics
• Print ISSN: 1363-6669
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 15
• Issue: 4
• Pages: 745-757
• DOI: https://doi.org/10.1111/j.1467-9361.2011.00640.x
• Keywords: Geography, Planning and Development; Development
• Public URL: https://hull-repository.worktribe.com/output/465665
• Publisher URL: https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-9361.2011.00640.x
• Contract Date: Nov 13, 2014