This paper examines the absorption of government spending shocks in the presence of formal and informal production. Calibrating a two-sector open economy model that is consistent with data from India for the period 1990-2017, we show that increases in both government consumption and investment...

The standard procedure for analyzing transitional dynamics in non-linear macro models has been to employ linear approximations. This paper investigates the reliability of this procedure in evaluating the dynamic adjustments to policy changes or structural shocks. We analyze this issue using the...