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Government Spending and Real Interest Rate in an Open Economy

REVIEW OF INTERNATIONAL ECONOMICS, September 20, 1996

Posted: 7 Oct 1996  

Wen-Ya Chang

Fu-Jen Catholic University

Hsueh-Fang Tsai

Fu-Jen Catholic University

Abstract

This paper investigates the dynamic effect of government spending in an optimizing monetary model of open economy with capital immobility and fixed exchange rates. It is found that a rise in government spending will always lead to a reduction in real interest rates on impact. Moreover, real interest rates can be lower during periods of high temporary government spending. This result is conformable with the observation of low real interest rates during wars.

JEL Classification: F41

Suggested Citation

Chang, Wen-Ya and Tsai, Hsueh-Fang, Government Spending and Real Interest Rate in an Open Economy. REVIEW OF INTERNATIONAL ECONOMICS, September 20, 1996. Available at SSRN: https://ssrn.com/abstract=3378

Wen-Ya Chang (Contact Author)

Fu-Jen Catholic University ( email )

Hsinchuang
Taipei, 24205
Taiwan
11-886-29031111 ext. 2633 (Phone)
11-886-2-2093475 (Fax)

Hsueh-Fang Tsai

Fu-Jen Catholic University ( email )

Hsinchuang
Taipei, 24205
Taiwan

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