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Fiscal Policy and the Terms of Trade in an Analytical Two-Country Dynamic Model

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Marcelo Bianconi ()

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Abstract

This paper presents a two-country dynamic perfect foresight Ricardian model with wealth effects to study the relationship between government spending financed by alternative taxation, the terms of trade and welfare. An increase in domestic government spending financed by a distortionary capital income tax leads the real exchange rate initially to appreciate (a pure demand effect). But along the transitional path an intertemporal terms of trade effect (a supply side effect) operates and the real exchange rate depreciates to a steady state value ultimately higher relative to the initial equilibrium. The welfare of the domestic resident increases due to a reversed immiserizing growth effect. Copyright Kluwer Academic Publishers 2003

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File URL: http://hdl.handle.net/10.1023/A:1022224928986
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Publisher Info
Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 10 (2003)
Issue (Month): 1 (January)
Pages: 25-41
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Handle: RePEc:kap:apfinm:v:10:y:2003:i:1:p:25-41

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Web page: http://springerlink.metapress.com/link.asp?id=102851

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Keywords: government spending; taxes; terms of trade;

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References listed on IDEAS
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  1. Cantor, Richard & Mark, Nelson C, 1988. "The International Transmission of Real Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 493-507, August. [Downloadable!] (restricted)
  2. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March. [Downloadable!] (restricted)
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  3. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March. [Downloadable!] (restricted)
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  4. Sen, P. & Turnovsky, S.J., 1990. "Investment Tax Credit In An Open Economy," Working Papers 90-09, University of Washington, Department of Economics.
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  5. Bianconi, Marcelo, 1995. "Fiscal policy in a simple two-country dynamic model," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 395-419. [Downloadable!] (restricted)
  6. Marcelo Bianconi & Stephen J. Turnovsky, 1997. "International Effects of Government Expenditure in Interdependent Economies," Canadian Journal of Economics, Canadian Economics Association, vol. 30(1), pages 57-84, February. [Downloadable!] (restricted)
  7. Stephen J. Turnovsky, 1997. "International Macroeconomic Dynamics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262201119.
  8. Brock, Philip L & Turnovsky, Stephen J, 1993. "The Growth and Welfare Consequences of Differential Tariffs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 765-94, November. [Downloadable!] (restricted)
  9. Turnovsky, S.J. & Sen, P., 1990. "Fiscal Policy, Capital Accumulation, And Debt In An Open Economy," Working Papers 90-18, University of Washington, Department of Economics.
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  10. Obstfeld, Maurice, 1989. "Fiscal deficits and relative prices in a growing world economy," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 461-484, May. [Downloadable!] (restricted)
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  11. Turnovsky, Stephen J & Bianconi, Marcelo, 1992. "The International Transmission of Tax Policies in a Dynamic World Economy," Review of International Economics, Blackwell Publishing, vol. 1(1), pages 49-72, November.
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  12. Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Shinsuke Ikeda & Ichiro Gombi, 2004. "Habit Formation in an Interdependent World Economy," ISER Discussion Paper 0619, Institute of Social and Economic Research, Osaka University, revised Jul 2008. [Downloadable!]
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