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Fiscal Policies and the Terms of Trade in an Endogenous Growth Model with Overlapping Generations

  • Mourmouras, Iannis A.
  • Ghosh, Sugata

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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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 22 (2000)
Issue (Month): 3 (July)
Pages: 445-470

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Handle: RePEc:eee:jmacro:v:22:y:2000:i:3:p:445-470
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