Fiscal policy and growth in a small open economy with elastic labour supply

Endogenizing labour supply leads to fundamental changes in the equilibrium structure of the AK growth model of a small open economy. The balanced grow th equilibrium is described by two tradeoff loci relating the equilibrium g rowth rate to the fraction of time devoted to leisure. The implications of endogenous labour supply for fiscal policy are addressed The effects of dis tortionary taxes and government expenditure on the equilibrium growth-leisu re (employment) tradeoff are analysed. The responses contrast with both tho se of a closed economy, having an elastic labour supply, and an open econom y with fixed labour supply. Optimal fiscal policy is also characterized.