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Fiscal Policy in Open, Interdependent Economies

In: Economic Policy in Theory and Practice

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  • Willem Buiter

Abstract

The paper studies fiscal policy in the open economy. It proceeds from the very small country, which is a price taker in the world financial market and in the markets for imports and exports, via the semi-small country, which has some market power in the market for its exportable, to the interdependent two-country case. To keep the analysis tractable, a very simple production structure is assumed: each country consumes both domestic and foreign output but is wholly specialised in the production of its exportable. So as to be able to analyse ‘crowding out’ issues in the short run and the long run, firms in each country can engage in capital formation. Only domestic output can be transformed into domestic capital, and the investment process is subject to strictly convex internal costs of adjustment. There is no money in the model, but international portfolio lending and borrowing can occur in an integrated global financial market. There is no direct foreign investment. Rational point expectations and certainty equivalence are assumed throughout, so all stores of value are perfect substitutes in private portfolios. As cyclical, Keynesian issues are not the focus of this paper, full employment is assumed throughout.

Suggested Citation

  • Willem Buiter, 1987. "Fiscal Policy in Open, Interdependent Economies," Palgrave Macmillan Books, in: Assaf Razin & Efraim Sadka (ed.), Economic Policy in Theory and Practice, chapter 3, pages 101-144, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-18584-9_3
    DOI: 10.1007/978-1-349-18584-9_3
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    1. Buiter, Willem H, 1981. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 769-797, August.
    2. Miller, Marcus & Salmon, Mark, 1985. "Dynamic Games and the Time Inconsistency of Optimal Policy in Open Economies," Economic Journal, Royal Economic Society, vol. 95(380a), pages 124-137, Supplemen.
    3. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    4. Frenkel, Jacob & Razin, Assaf, 1984. "Budget Deficits and Rates of Interest in the World Economy," Foerder Institute for Economic Research Working Papers 275380, Tel-Aviv University > Foerder Institute for Economic Research.
    5. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    6. Bean, Charles R, 1986. "The Terms of Trade, Labour Supply and the Current Account," Economic Journal, Royal Economic Society, vol. 96(380a), pages 38-46, Supplemen.
    7. Jacob A. Frenkel & Assaf Razin, 1984. "Fiscal Policies, Debt, and International Economic Interdependence," NBER Working Papers 1266, National Bureau of Economic Research, Inc.
    8. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
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