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Fiscal Policies and International Financial Markets

In: International Aspects of Fiscal Policies

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  • Alan C. Stockman

Abstract

This paper examines the effects of fiscal policies in an open economy when international financial markets are well developed. Consumers use these markets to hedge against the risk of uncertain future changes in government policies. These portfolio allocations alter the effects of changes in government policies, if and when they occur, as compared to a world with more limited financial markets. Three examples are discussed. The first involves a change in (productive) government spending, financed by a change in lump-sum taxes, in a large open economy with two goods. The second example concerns the effects of temporary changes in distorting taxes. The final example concerns the open-economy effects of changes in government deficits, due to changes in lump-sum taxes, without Ricardian equivalence. In each example the existence of opportunities to trade on well-developed international financial markets is shown to alter, in important ways, the effects of changes in government policies. The empirical significance of these differences should grow as international financial markets continue to develop in breadth and sophistication.

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This chapter was published in:

  • Jacob A. Frenkel, 1988. "International Aspects of Fiscal Policies," NBER Books, National Bureau of Economic Research, Inc, number fren88-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 7927.

    Handle: RePEc:nbr:nberch:7927

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    1. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(2), pages 223-47, April.
    2. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc.
    3. Cooley, Thomas F & LeRoy, Stephen F & Raymon, Neil, 1984. "Econometric Policy Evaluation: Note," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 467-70, June.
    4. Stockman, Alan C. & Dellas, Harris, 1986. "Asset markets, tariffs, and political risk," Journal of International Economics, Elsevier, Elsevier, vol. 21(3-4), pages 199-213, November.
    5. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(3), pages 564-94, June.
    6. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, American Economic Association, vol. 73(5), pages 994-1010, December.
    7. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
    8. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 75(1), pages 117-27, March.
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    Cited by:
    1. Maurico Obstfeld, 2004. "External adjustment," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 140(4), pages 541-568, December.
    2. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier.
    3. Reinhart, Carmen, 1990. "Fiscal policy, the real exchange rate and commodity prices: A global framework," MPRA Paper 14102, University Library of Munich, Germany.

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