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Fiscal deficits and relative prices in a growing world economy

  • Obstfeld, Maurice

This paper studies the transmission of fiscal disturbances between countries, and the effect of those disturbances on worldwide capital intensity, in a context of growth. The model developed to address these issues allows for the production of both nontradable and relatively capital-intensive tradable goods; a central finding is that factor markets can be a major channel for the communication of fiscal policy shocks to world interest rates, to private saving decisions, and, ultimately, to global asset supplies and their distribution among countries. Particular predictions of the model illustrate how changes in public debt ratios and shifts in government spending patterns affect resource allocation and welfare. For example, an increase in a small country's per capita public debt leads to long-run crowding-in of capital and the impoverishment of future generations; a similar policy shift by a large country crowds out capital on a global scale, impoverishes future domestic generations, and has ambiguous effects abroad.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 23 (1989)
Issue (Month): 3 (May)
Pages: 461-484

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Handle: RePEc:eee:moneco:v:23:y:1989:i:3:p:461-484
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Maurice Obstfeld, 1985. "The Capital Inflows Problem Revisited: A Stylized Model of Southern Cone Disinflation," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 605-625.
  2. Giovannini, Alberto, 1988. "The real exchange rate, the capital stock, and fiscal policy," European Economic Review, Elsevier, vol. 32(9), pages 1747-1767, November.
  3. James Tobin, 1986. "The Monetary-Fiscal Mix: Long-Run Implications," Cowles Foundation Discussion Papers 780, Cowles Foundation for Research in Economics, Yale University.
  4. Persson, Torsten, 1985. "Deficits and intergenerational welfare in open economies," Journal of International Economics, Elsevier, vol. 19(1-2), pages 67-84, August.
  5. Willem H. Buiter, 1979. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," NBER Working Papers 0352, National Bureau of Economic Research, Inc.
  6. Jacob A. Frenkel & Assaf Razin, 1986. "Deficits with Distortionary Taxes: International Dimensions," NBER Working Papers 2080, National Bureau of Economic Research, Inc.
  7. Fried, Joel & Howitt, Peter, 1988. "Fiscal deficits, international trade and welfare," Journal of International Economics, Elsevier, vol. 24(1-2), pages 1-22, February.
  8. Jeremy Greenwood & Kent P. Kimbrough, 1985. "Capital Controls and Fiscal Policy in the World Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 18(4), pages 743-65, November.
  9. Engel, Charles & Kletzer, Kenneth, 1989. "Saving and Investment in an Open Economy with Non-traded Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 735-52, November.
  10. Bennett T. McCallum, 1982. "Are Bond-Financed Deficits Inflationary? A Ricardian Analysis," NBER Working Papers 0905, National Bureau of Economic Research, Inc.
  11. Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-32, March.
  12. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  13. Feldstein, Martin S, 1976. "Perceived Wealth in Bonds and Social Security: A Comment," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 331-36, April.
  14. Razin, Assaf, 1984. "Capital movements, intersectoral resource shifts and the trade balance," European Economic Review, Elsevier, vol. 26(1-2), pages 135-152.
  15. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  16. repec:oup:restud:v:52:y:1985:i:4:p:605-25 is not listed on IDEAS
  17. Romer, D., 1988. "What Are The Costs Of Excessive Deficits?," Papers 14, Princeton, Woodrow Wilson School - Discussion Paper.
  18. Jacob A. Frenkel & Assaf Razin, 1986. "The International Transmission and Effects of Fiscal Policies," NBER Working Papers 1799, National Bureau of Economic Research, Inc.
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