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Monetary and Fiscal Policy under Perfect Foresight: A Symmetric Two-country Analysis

  • Turnovsky, Stephen J

This paper analyzes the effects of anticipated and unanticipated domestic monetary and fiscal expansions on both the domestic and foreign economies. The analysis is based on symmetric behavior, which is not only not an unreasonable first approximation, but also offers significant analytical advantages. Specifically, it enables the dynamics of the system to be decoupled into (a) averages and (b) differences of relevant variables. Not only does this render the analysis tractable, but it also helps provide economic insight. One striking aspect is that the differences, but not the averages, respond to announcements. The consequences of this for the dynamic adjustments of the two economies to the various disturbances are discussed at length.

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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 53 (1986)
Issue (Month): 210 (May)
Pages: 139-57

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Handle: RePEc:bla:econom:v:53:y:1986:i:210:p:139-57
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  1. Gray, Malcolm R & Turnovsky, Stephen J, 1979. "The Stability of Exchange Rate Dynamics under Perfect Myopic Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(3), pages 643-60, October.
  2. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
  3. Obstfeld, Maurice & Stockman, Alan C., 1985. "Exchange-rate dynamics," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977 Elsevier.
  4. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  5. Marcus Miller & Mark Salmon, 1985. "Policy Coordination and Dynamic Games," NBER Chapters, in: International Economic Policy Coordination, pages 184-227 National Bureau of Economic Research, Inc.
  6. Willem H. Buiter & Richard C. Marston, 1985. "International Economic Policy Coordination," NBER Books, National Bureau of Economic Research, Inc, number buit85-1, October.
  7. Hamada, Koichi & Sakurai, Makoto, 1978. "International Transmission of Stagflation under Fixed and Flexible Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 877-95, October.
  8. Canzoneri, Matthew B & Gray, Jo Anna, 1985. "Monetary Policy Games and the Consequences of Non-cooperative Behavior," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 547-64, October.
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