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Fiscal Policies and Real Exchange Rates in the World Economy

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  • Jacob A. Frenkel
  • Assaf Razin

Abstract

This paper examines the effects of fiscal policies on the evolution of real rates of interest and real exchange rates in the interdependent world economy. We construct an analytical framework suitable for a detailed examination of the various channels through which these variables are influenced by government spending and by tax policies. The analytical framework employs a general equilibrium approach highlighting the roles played by wealth effects and by temporal and intertemporal substitution effects. The general principle illustrated by the analysis of the dynamic effects of budget deficits is that the consequences of temporary tax policies stretch beyond the period during which the temporary policies are in effect. The counterpart to these dynamic implications is the rise in the economy's external debt induced by the budget deficit the service of which stretches into the indefinite future. By series of examples, allowing for both distortionary and non-distortionary taxes and for various patterns of government spending, it is shown that the quantitative and qualitative effects of fiscal policies on real exchange rates, real interest rates, debt accumulation and the like depend critically on the commodity composition of government spending and its intertemporal allocations on the one hand, and on the details of government debt issue and tax structure, including the timing of taxes and borrowing and the types of taxes used to finance the budget, on the other hand.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2065.

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Date of creation: Nov 1986
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Publication status: published as "Spending, Taxes, and Deficits: International-Intertemporal Approach." From Princeton Studies in International Finance, No. 63, pp. 1-44,(December 1988).
Handle: RePEc:nbr:nberwo:2065

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References

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  1. Willem H. Buiter, 1986. "Structural and Stabilization Aspects of Fiscal and Financial Policy in the Dependent Economy," NBER Working Papers 2023, National Bureau of Economic Research, Inc.
  2. 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.
  3. William H. Branson & Jacob A. Frenkel, 1985. "Causes of Appreciation and Volatility of the Dollar with Comment by Jacob Frenkel," NBER Working Papers 1777, National Bureau of Economic Research, Inc.
  4. Elhanan Helpman & Assaf Razin, 1985. "Exchange Rate Management: Intertemporal Tradoffs," NBER Working Papers 1590, National Bureau of Economic Research, Inc.
  5. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  6. Frenkel, Jacob A & Razin, Assaf, 1985. "Government Spending, Debt, and International Economic Interdependence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 95(379), pages 619-36, September.
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Cited by:
  1. Sebastian Edwards, 1987. "Anticipated Protectionist Policies, Real Exchange Rates and the Current Account," UCLA Economics Working Papers 437, UCLA Department of Economics.
  2. Simarmata, Djamester A., 2007. "Keberlanjutan Fiskal di Indonesia
    [Fiscal Sustainability in Indonesia]
    ," MPRA Paper 41344, University Library of Munich, Germany.

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