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Fiscal policies and the terms of trade in an endogenous growth model with overlapping generations

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  • Mourmouras, I.A.
  • Ghosh, S.

Abstract

This paper investigates how changes in fiscal policy can affect relative prices, optimal savings and steady state utility in a two-country, overlapping generations model of endogenous growth. We develop a simple model that combines Blanchard-type consumers with uncertain lifetimes, with an endogenous growth model … la Romer in which there are production externalities from the capital stock of other firms. The basic insight is to highlight, within an optimising framework, a potentially interesting link between fiscal policy and the terms of trade. A permanent rise in one country's share of government consumption to GDP results in an improvement in its terms of trade, a fall in its share of private consumption to GDP and a lower growth rate. A steady state rise in the public debt to GDP ratio results in an increase in the share of consumption to GDP, a higher demand for the foreign good and a lower growth rate. The effect upon the terms of trade is, however, ambiguous.

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Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 9719.

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Date of creation: 01 Jan 1997
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Handle: RePEc:stn:sotoec:9719

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