This paper analyzes the effects of fiscal policy using a two-country general equilibrium model. A key finding is that a shift in government spending from productive purchases to consumption purchases causes a rising trade deficit and an appreciation of the terms of trade, consistent with the U.S. experiences in the 1980s. Productive public services play a critical role in these adjustments by driving a wedge between the rates of return on domestic and foreign capital. A temporary cut in the capital income tax is also crucial for explaining a persistent trade deficit and an appreciation of the terms of trade. Copyright 1995 by Ohio State University Press.
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Volume (Year): 27 (1995) Issue (Month): 3 (August) Pages: 742-61 Download reference. The following formats are available: HTML
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