Fiscal Policies, Debt, and International Economic Interdependence

64 Pages Posted: 22 Oct 2000 Last revised: 22 Dec 2000

See all articles by Jacob A. Frenkel

Jacob A. Frenkel

Merrill Lynch & Co. - Sovereign Advisory Group and Global Financial Institutions Group; National Bureau of Economic Research (NBER)

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: 1984

Abstract

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.

Suggested Citation

Frenkel, Jacob A. and Razin, Assaf, Fiscal Policies, Debt, and International Economic Interdependence (1984). NBER Working Paper No. w1266. Available at SSRN: https://ssrn.com/abstract=243212

Jacob A. Frenkel

Merrill Lynch & Co. - Sovereign Advisory Group and Global Financial Institutions Group

New York, NY
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Assaf Razin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7303 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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