Fiscal Policy and the Terms of Trade in an Analytical Two-Country Dynamic Model
AbstractThis paper presents a two-country dynamic perfect foresight Ricardian model with wealth effects to study the relationship between government spending financed by alternative taxation, the terms of trade and welfare. An increase in domestic government spending financed by a distortionary capital income tax leads the real exchange rate initially to appreciate (a pure demand effect). But along the transitional path an intertemporal terms of trade effect (a supply side effect) operates and the real exchange rate depreciates to a steady state value ultimately higher relative to the initial equilibrium. The welfare of the domestic resident increases due to a reversed immiserizing growth effect.
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Bibliographic InfoPaper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0302.
Date of creation: 2003
Date of revision:
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Other versions of this item:
- Bianconi, Marcelo, 2003. "Fiscal Policy and the Terms of Trade in an Analytical Two-Country Dynamic Model," International Tax and Public Finance, Springer, vol. 10(1), pages 25-41, January.
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
- H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
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