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The Effects of Fiscal Policy in a Two-Country World Economy: An Intertemporal Analysis

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  • Lee, Yeonho

Abstract

This paper analyzes the effects of fiscal policy using a two-country general equilibrium model. A key finding is that a shift in government spending from productive purchases to consumption purchases causes a rising trade deficit and an appreciation of the terms of trade, consistent with the U.S. experiences in the 1980s. Productive public services play a critical role in these adjustments by driving a wedge between the rates of return on domestic and foreign capital. A temporary cut in the capital income tax is also crucial for explaining a persistent trade deficit and an appreciation of the terms of trade. Copyright 1995 by Ohio State University Press.

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  • Lee, Yeonho, 1995. "The Effects of Fiscal Policy in a Two-Country World Economy: An Intertemporal Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 742-761, August.
  • Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:3:p:742-61
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    Cited by:

    1. Stephen Turnovsky, 2000. "Growth in an Open Economy: Some Recent Developments," Working Papers 0015, University of Washington, Department of Economics.
    2. Peeters, Marga, 1999. "The Public-Private Savings Mirror and Causality Relations Among Private Savings, Investment, and (twin) Deficits: A Full Modeling Approach," Journal of Policy Modeling, Elsevier, vol. 21(5), pages 579-605, September.

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