Fiscal Policy and the Terms of Trade in an Analytical Two-Country Dynamic Model
AbstractThis 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 2003 by Kluwer Academic Publishers
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Bibliographic InfoArticle provided by Springer in its journal International Tax and Public Finance.
Volume (Year): 10 (2003)
Issue (Month): 1 (January)
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Web page: http://www.springerlink.com/link.asp?id=102915
Other versions of this item:
- Marcelo Bianconi, 2003. "Fiscal Policy and the Terms of Trade in an Analytical Two-Country Dynamic Model," Discussion Papers Series, Department of Economics, Tufts University 0302, Department of Economics, Tufts University.
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
- H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
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