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Channels of international policy transmission

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  • van der Ploeg, Frederick

Abstract

A two-country, intertemporal, perfect-foresight model with micro foundations, floating exchange rates, uncovered interest parity, and nominal wage rigidities is formulated. The benchmark case corresponds to unit elasticities of intertemporal and intratemporal substitution in consumption, no initial holdings of foreign assets and infinite lifetimes. Monetary disinflation and an increase in government spending then have no spillover effects on foreign consumption and employment and there are no current account dynamics. Four channels of international policy transmission are then analysed. The first is based on capital gains on holdings of foreign assets. The spillover effects arising through the second and third channel depend on whether goods are gross substitutes or gross complements and on whether the elasticity of intertemporal substitution is less or greater than unity. The final channel assumes finite lifetimes and no bequest motive. It departs from debt neutrality in order to allow wealth effects and current account dynamics to play a more interesting role and to assess the difference between tax and debt finance.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 34 (1993)
Issue (Month): 3-4 (May)
Pages: 245-267

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Handle: RePEc:eee:inecon:v:34:y:1993:i:3-4:p:245-267

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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  1. Giovannini, Alberto, 1988. "The real exchange rate, the capital stock, and fiscal policy," European Economic Review, Elsevier, vol. 32(9), pages 1747-1767, November.
  2. Svensson, Lars E O & van Wijnbergen, Sweder, 1989. "Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances," Economic Journal, Royal Economic Society, vol. 99(397), pages 785-805, September.
  3. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  4. Buiter, Willem H. & Miller, Marcus, 1982. "Real exchange rate overshooting and the output cost of bringing down inflation," European Economic Review, Elsevier, vol. 18(2), pages 85-123.
  5. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  6. David Currie & Paul Levine, 1985. "Macroeconomic Policy Design In An Interdependent World," NBER Chapters, in: International Economic Policy Coordination, pages 228-273 National Bureau of Economic Research, Inc.
  7. Buiter, Willem H, 1984. "Saddlepoint Problems in Continuous Time Rational Expectations Models: A General Method and Some Macroeconomic Examples," Econometrica, Econometric Society, vol. 52(3), pages 665-80, May.
  8. Marcus Miller & Mark Salmon, 1985. "Policy Coordination And Dynamic Games," NBER Chapters, in: International Economic Policy Coordination, pages 184-227 National Bureau of Economic Research, Inc.
  9. Van Der Ploeg, F., 1986. "Monetary disinflation in a simple two-country model," Economics Letters, Elsevier, vol. 22(1), pages 73-76.
  10. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  11. Markink & A.J. & Van Der Ploeg.F, 1989. "Dynamic Policy Simulation Of Linear Models With Rational Expectations Of Future Events: A Computer Package," Papers 8906, Tilburg - Center for Economic Research.
  12. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-71, December.
  13. Rankin, Neil, 1987. "An Intertemporal Version of Mundell's Two-Country Flexible Exchange Rates Model with Disequilibrium Microfoundations: Is Policy Interdependence Inevitable?," CEPR Discussion Papers 185, C.E.P.R. Discussion Papers.
  14. Svensson, Lars E O, 1987. " International Fiscal Policy Transmission," Scandinavian Journal of Economics, Wiley Blackwell, vol. 89(3), pages 305-34.
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Citations

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Cited by:
  1. Nicola Acocella & Giovanni Di Bartolomeo, 2003. "Wage and Public Expenditure Setting in a Monetary Union," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 6(1-2), pages 1-16, May - Nov.
  2. Tille, Cedric, 2001. "The role of consumption substitutability in the international transmission of monetary shocks," Journal of International Economics, Elsevier, vol. 53(2), pages 421-444, April.
  3. Rankin, Neil & Scalera, Domenico, 1995. "Death and the Keynesian multiplier," Ricerche Economiche, Elsevier, vol. 49(1), pages 75-87, March.
  4. Ono, Y., 2001. "International Spillover of Economic Fluctuations:A Dynamic Optimization Approach," ISER Discussion Paper 0527, Institute of Social and Economic Research, Osaka University.
  5. Ballabriga, Fernando & Sebastian, Miguel & Valles, Javier, 1999. "European asymmetries," Journal of International Economics, Elsevier, vol. 48(2), pages 233-253, August.
  6. Yoshiyasu Ono, 2006. "Protective Trade Policies 'Reduce' Employment: A Dynamic Optimization Approach," ISER Discussion Paper 0659, Institute of Social and Economic Research, Osaka University.
  7. Leachman, Lori L. & Francis, Bill, 1995. "Long-run relations among the G-5 and G-7 equity markets: Evidence on the Plaza and Louvre Accords," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 551-577.
  8. Gernot J. Mueller, 2004. "Understanding the Dynamic Effects of Government Spending on Foreign Trade," Economics Working Papers ECO2004/27, European University Institute.
  9. Ken-ichi Hashimoto, 2004. "Intergenerational Transfer and Effective Demand," Economics Bulletin, AccessEcon, vol. 5(1), pages 1-13.

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