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Fiscal Policies and International Financial Markets

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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.

Suggested Citation

  • Alan C. Stockman, 1986. "Fiscal Policies and International Financial Markets," NBER Working Papers 1961, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1961
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    References listed on IDEAS

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    1. Stockman, Alan C. & Dellas, Harris, 1986. "Asset markets, tariffs, and political risk," Journal of International Economics, Elsevier, vol. 21(3-4), pages 199-213, November.
    2. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-127, March.
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    7. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-594, June.
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    Cited by:

    1. Carmen M. Reinhart, 1991. "Fiscal Policy, the Real Exchange Rate, and Commodity Prices," IMF Staff Papers, Palgrave Macmillan, vol. 38(3), pages 506-524, September.
    2. Maurico Obstfeld, 2004. "External adjustment," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 140(4), pages 541-568, December.
    3. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799, Elsevier.
    4. Barari, Mahua, 1992. "Asset markets, stochastic policy and international trade," ISU General Staff Papers 1992010108000010972, Iowa State University, Department of Economics.
    5. Marques, Luis B, 2007. "Welfare Implications of Exchange Rate Changes," MPRA Paper 5721, University Library of Munich, Germany.

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