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Fiscal Policies, Debt, and International Economic Interdependence

  • Jacob A. Frenkel
  • Assaf Razin

This paper deals with the relation between government spending and real rates of interest as well as with the international transmission of fiscal policies.The dependence of the patterns of consumption in one country on fiscal policiesin the rest of the world are examined. For this purpose a general equilibrium model which is characterized by fully integrated world capital marketsis constructed, economic agents behave rationally, and government policies are constrained to obey the intertemporal solvency requirements. It is shown that the effects of changes 'in countries' net debt or position as well as the effects offiscal policies can be analyzed by reference to a multitude of "transfer problems criteria", which are familiar from the theory of international economic transfers. In the present case the impact of policies depends on the relations among the spending patterns of domestic and foreign private sectors; of domestic and foreign governments, as well as of domestic and foreign saving propensities.The analysis draws a distinction between permanent and transitory policies as well as between current policies and expected future policies.A transitory current fiscal spending, must crowd out the foreign private sector and, thereby,result in a negative transmission. However, a transitory future rise in government spending induces an immediate increase in foreign private sector's consumption and thereby results in a positive current transmission. These responses are reflected in the current account of the balance-of-payments, in changes in the net debtor-creditor positions, and in complex changes in the term structure of interest rates. It is also shown that with full integration of capital markets,fiscal policies may exert different qualitative effects on real rates of interestin different countries since, depending on the structural parameters, the relative prices of non-traded goods, and thereby the price indices, might be negatively correlated between countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1266.

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Date of creation: Jan 1984
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Publication status: published as Frenkel, Jacob A. and Assaf Razin. "Government Spending, Debt, and International Economic Interdependence," The Economic Journal, Vol. 95, (September 1985) pp. 619-636.
Handle: RePEc:nbr:nberwo:1266
Note: ITI EFG IFM
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  1. Razin, Assaf & Svensson, Lars E. O., 1983. "The current account and the optimal government debt," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 215-224, August.
  2. Jacob A. Frenkel & Carlos A. Rodriguez, 1982. "Exchange Rate Dynamics and the Overshooting Hypothesis," NBER Working Papers 0832, National Bureau of Economic Research, Inc.
  3. Helpman, Elhanan & Razin, Assaf, 1982. "Dynamics of a Floating Exchange Rate Regime," Scholarly Articles 3445095, Harvard University Department of Economics.
  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. Feldstein, Martin, 1983. "Domestic saving and international capital movements in the long run and the short run," European Economic Review, Elsevier, vol. 21(1-2), pages 129-151.
  6. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  7. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  8. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  9. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
  10. Harberger, Arnold C, 1980. "Vignettes on the World Capital Market," American Economic Review, American Economic Association, vol. 70(2), pages 331-37, May.
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