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Fiscal Policy and the Terms of Trade in an Analytical Two-Country Dynamic Model


  • Marcelo Bianconi


This paper presents a two-country dynamic perfect foresight Ricardian model with wealth effects to study the relationship between government spending financed by alternative taxation, the terms of trade and welfare. An increase in domestic government spending financed by a distortionary capital income tax leads the real exchange rate initially to appreciate (a pure demand effect). But along the transitional path an intertemporal terms of trade effect (a supply side effect) operates and the real exchange rate depreciates to a steady state value ultimately higher relative to the initial equilibrium. The welfare of the domestic resident increases due to a reversed immiserizing growth effect.

Suggested Citation

  • Marcelo Bianconi, 2003. "Fiscal Policy and the Terms of Trade in an Analytical Two-Country Dynamic Model," Discussion Papers Series, Department of Economics, Tufts University 0302, Department of Economics, Tufts University.
  • Handle: RePEc:tuf:tuftec:0302

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    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Ikeda, Shinsuke & Gombi, Ichiro, 2009. "Habit Formation In An Interdependent World Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 13(04), pages 477-492, September.
    2. Daisuke Amano & Jun-ichi Itaya & Kazuo Mino, 2014. "Trade Structure and Growth Effects of Taxation in a Two-Country World," CESifo Working Paper Series 4882, CESifo Group Munich.
    3. Karl FARMER & Jacopo ZOTTI, "undated". "Sustainable Government Debt in a Two-Country, Two-Good Overlapping Generations Model," EcoMod2009 21500030, EcoMod.
    4. Birgit Bednar-Friedl, 2012. "Climate policy targets in emerging and industrialized economies: the influence of technological differences, environmental preferences and propensity to save," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 39(2), pages 191-215, May.

    More about this item

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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