Fiscal policy in open, interdependent economies
The paper studies the effects of alternative financing policies in the open economy.There is a non-trivial role for financial policy because of the failure of first-order debt neutrality due to uncertain private lifetimes. Both the single-country case and the interdependent two-country case are considered. Capital formation is endogenous and there are unified global financial and goods markets determining the interest rate, each country's"Tobin's q" and the terms of trade. The government's present value budget constraint or solvency constraint and the assumption that the interestrate exceeds the growth rate imply that, given spending, current tax cutsimply future tax increases. Such policies boost the outstanding stock of public debt, raise the world interest rate, crowd out capital formation at home and abroad, and lead to a loss of foreign assets. Provided a"supply-side-response-corrected" transfer criterion is satisfied, the terms of trade will improve in the short run and worsen in the long run.
|Date of creation:||Aug 1984|
|Date of revision:|
|Publication status:||published as Buiter, Willem H."Fiscal Policy in Open, Interdependent Economies," Economic Policy in Theory and Practice, eds. A. Razin and E. Sadler, 1987. New York: St. Martins Press, pp. 101-144.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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3451400, Harvard University Department of Economics.
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- Jacob A. Frenkel & Assaf Razin, 1984. "Fiscal Policies, Debt, and International Economic Interdependence," NBER Working Papers 1266, National Bureau of Economic Research, Inc.
- Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
- Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
- Jacob A. Frenkel & Assaf Razin, 1984. "Budget Deficits and Rates of Interest in the World Economy," NBER Working Papers 1354, National Bureau of Economic Research, Inc.
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