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Government Purchases and Relative Prices in a Two‐Country World

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  • JONATHAN D. OSTRY

Abstract

The effects of government expenditures on the terms of trade, the real exchange rate, and the real interest rate are examined in a three‐goods (importables, exportables, and nontradables), two‐country, inter‐temporal, optimizing model. Temporary spending increases on tradable or nontradable goods may raise or lower the world return on internationally traded bonds and may improve or worsen the current account of the country undertaking the fiscal expansion. The paper's results also shed light on the theoretical determinants of the co‐movement between the terms of trade and the real exchange rate in response to changes in fiscal policies.

Suggested Citation

  • Jonathan D. Ostry, 1994. "Government Purchases and Relative Prices in a Two‐Country World," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 149-161, June.
    • Handle: RePEc:bla:ecorec:v:70:y:1994:i:209:p:149-161
    DOI: 10.1111/j.1475-4932.1994.tb01834.x
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    References listed on IDEAS

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    2. Kimolo, Deogratius & Mrema, Stanislaus, 2019. "Real Exchange Rate Misalignments in Tanzania," MPRA Paper 114672, University Library of Munich, Germany.

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