WHO PAYS FOR FISCAL EXPANSION - DISTRIBUTIONAL EFFECTS OF FISCAL SPENDING IN A SMALL OPEN-ECONOMY WITH FOREIGN-CAPITAL

Utilizing a static two-sector general equilibrium model, the distribut ional implications of fiscal spending in a small open economy are stud ied. In tile presence of foreign capital, two ''perverse'' effects of fiscal expansion are shown to be possible in stable equilibrium: 1) fi scal expansion may worsen the fiscal authority's welfare even if more resources are allocated for their consumption; 2) fiscal expansion may improve tile private agent's welfare even if the agent directly pa)is for the expansion. We discussed the conditions under which these resu lts can happen.