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Fiscal policy in open, interdependent economies

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  • Willem H. Buiter

Abstract

The paper studies the effects of alternative financing policies in the open economy.There is a non-trivial role for financial policy because of the failure of first-order debt neutrality due to uncertain private lifetimes. Both the single-country case and the interdependent two-country case are considered. Capital formation is endogenous and there are unified global financial and goods markets determining the interest rate, each country's"Tobin's q" and the terms of trade. The government's present value budget constraint or solvency constraint and the assumption that the interestrate exceeds the growth rate imply that, given spending, current tax cutsimply future tax increases. Such policies boost the outstanding stock of public debt, raise the world interest rate, crowd out capital formation at home and abroad, and lead to a loss of foreign assets. Provided a"supply-side-response-corrected" transfer criterion is satisfied, the terms of trade will improve in the short run and worsen in the long run.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1429.

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Date of creation: Aug 1984
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Publication status: published as Buiter, Willem H."Fiscal Policy in Open, Interdependent Economies," Economic Policy in Theory and Practice, eds. A. Razin and E. Sadler, 1987. New York: St. Martins Press, pp. 101-144.
Handle: RePEc:nbr:nberwo:1429

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  1. Jacob A. Frenkel & Assaf Razin, 1986. "Budget Deficits and Rates of Interest in the World Economy," NBER Working Papers 1354, National Bureau of Economic Research, Inc.
  2. Miller, Marcus & Salmon, Mark, 1984. "Dynamic Games and the Time Inconsistency of Optimal Policy in Open Economies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 27, C.E.P.R. Discussion Papers.
  3. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall.
  4. Buiter, Willem H, 1981. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 769-97, August.
  5. 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, University of Chicago Press, vol. 91(1), pages 97-125, February.
  6. Jacob A. Frenkel & Assaf Razin, 1984. "Fiscal Policies, Debt, and International Economic Interdependence," NBER Working Papers 1266, National Bureau of Economic Research, Inc.
  7. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
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Cited by:
  1. Serven, Luis, 1995. "Capital goods imports, the real exchange rate and the current account," Journal of International Economics, Elsevier, Elsevier, vol. 39(1-2), pages 79-101, August.
  2. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 19(2), pages 255-271, April.
  3. Jane Marrinan & Eric Van Wincoop, 1993. "Public And Private Savings And Investments," Boston College Working Papers in Economics, Boston College Department of Economics 259, Boston College Department of Economics.
  4. van Wijnbergen, Sweder, 1991. "Fiscal Deficits, Exchange Rate Crises and Inflation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(1), pages 81-92, January.
  5. Fisher, Walter H. & Heijdra, Ben J., 2009. "Keeping up with the ageing Joneses," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(1), pages 53-64, January.
  6. Frenkel, Jacob A & Razin, Assaf, 1987. "Fiscal Policies and the World Economy; An Intertemporal Approach (Cambridge, Mass.: MIT Press, 1987)," MPRA Paper 20438, University Library of Munich, Germany.
  7. Fillion, J.F., 1996. "L'endettement du Canada et ses effets sur les taux d'interet reels de long term," Working Papers, Bank of Canada 96-14, Bank of Canada.
  8. Jacob A. Frenkel & Assaf Razin, 1984. "The International Transmission of Fiscal Expenditures and Budget Deficits in the World Economy," NBER Working Papers 1527, National Bureau of Economic Research, Inc.
  9. Sen, P. & Turnovsky, S.J., 1990. "Investment Tax Credit In An Open Economy," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 90-09, Department of Economics at the University of Washington.
  10. Jacob A. Frenkel & Assaf Razin & Steve Symansky, 1991. "International VAT Harmonization: Economic Effects," NBER Working Papers 3656, National Bureau of Economic Research, Inc.
  11. Enrique G. Mendoza, 2001. "The International Macroeconomics of Taxation and the Case Against European Tax Harmonization," NBER Working Papers 8217, National Bureau of Economic Research, Inc.
  12. Mitchell, Peter R. & Sault, Joanne E. & Wallis, Kenneth F., 2000. "Fiscal policy rules in macroeconomic models: principles and practice," Economic Modelling, Elsevier, Elsevier, vol. 17(2), pages 171-193, April.
  13. Faik Koray & K. Peren Arin, . "International Transmission of Fiscal Shocks: An Empirical Investigation," Departmental Working Papers, Department of Economics, Louisiana State University 2006-03, Department of Economics, Louisiana State University.
  14. Bhandari, Jagdeep S. & Ul Haque, Nadeem & Turnovsky, Stephen J., 1989. "Growth, debt, and sovereign risk in a small, open economy," Policy Research Working Paper Series 260, The World Bank.
  15. Klundert, T.C.M.J. van de, 1988. "A macroeconomic two-country model with price-discriminating monopolists," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4875523, Tilburg University.
  16. Fisher, Walter H., 1995. "An optimizing analysis of the effects of world interest disturbances on the open economy term structure of interest rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(1), pages 105-126, February.

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