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Fiscal Deficits and Relative Prices in a Growing World Economy

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Author Info
Maurice Obstfeld

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Abstract

This paper studies the transmission of fiscal disturbances between countries, and the effect of those disturbances on worldwide capital intensity, in a context of growth. The model developed to address these issues allows for the production of both nontradable and relatively capital-intensive tradable goods; a central finding is that factor markets can be a major channel for the communication of fiscal policy shocks to world interest rates, to private saving decisions, and, ultimately, to global asset supplies and their distribution among countries. Particular predictions of the model illustrate how changes in public debt ratios and shifts in government spending patterns affect resource allocation and welfare. For example, an increase in a small country's per capita public debt leads to long-run crowding-in of capital and the impoverishment of future generations; a similar policy shift by a large country crowds out capital on a global scale, impoverishes future domestic generations, and has ambiguous effects abroad.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2725.

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Date of creation: Oct 1989
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Publication status: published as Journal of Monetary Economics, Vol. 23, No.3, pp. 461-484, (May 1989).
Handle: RePEc:nbr:nberwo:2725

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  1. Maurice Obstfeld, 1993. "International Adjustment with Habit-Forming Consumption: A Diagrammatic Exposition," NBER Working Papers 4094, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Relative price movements in dynamic general equilibrium models of international trade," Working Paper 9213, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  3. Graciela L. Kaminsky & Michael Klein, 1994. "The Real Exchange Rate and Fiscal Policy During the Gold Standard PeriodEvidence from the United States and Great Britain," NBER Working Papers 4809, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Erling Steigum & Oystein Thogersen, 2001. "Borrow and Adjust: Fiscal Policy and Sectoral Adjustment in an Open Economy," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  5. Ramon Moreno, 1988. "Saving, investment, and the U.S. external balance," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 3-17. [Downloadable!]
  6. Alberto Petrucci, 2004. "Asset Accumulation, Fertility Choice and Nondegenerate Dynamics in a Small Open Economy," Working Papers 2004.121, Fondazione Eni Enrico Mattei. [Downloadable!]
  7. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the Trade Balance and the Terms of Trade: The S-Curve," NBER Working Papers 4242, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Olivier Cardi & Romain Restout, 2007. "Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model," Working Papers 0720, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure. [Downloadable!]
  9. Philip L. Brock & Stephen J. Turnovsky, 1992. "The Growth and Welfare Consequences of Differential Tariffs With Endogenously-Supplied Capital and Labor," NBER Working Papers 4011, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Javier Coto-Martinez & Huw Dixon, . "Fiscal Policy in an Imperfectly Competitive Dynamic Small Open Economy," Discussion Papers 99/19, Department of Economics, University of York. [Downloadable!]
  11. Partha Sen & Stephen J. Turnovsky, 1991. "Investment Tax Credit in an Open Economy," NBER Working Papers 3298, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Reuven Glick & Michael Hutchison, 1990. "Economic integration and fiscal policy transmission: implications for Europe in 1992 and beyond," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 17-28. [Downloadable!]
  13. Olivier Cardi & Romain Restout, 2007. "Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model," Post-Print halshs-00174574_v1, HAL. [Downloadable!]
  14. Giancarlo Marini & Giovanni Piersanti, 2001. "Fiscal Deficits And Currency Crises," Departmental Working Papers 140, Tor Vergata University, CEIS. [Downloadable!]
    Other versions:
  15. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International Business Cycles: Theory and Evidence," NBER Working Papers 4493, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. Chae-Deug Yi, 2003. "An Empirical Analysis Of Ricardian Equivalence On Real Exchange Rate And Current Account: Korea," International Economic Journal, Korean International Economic Association, vol. 17(4), pages 61-83, December. [Downloadable!] (restricted)
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