REVIEW OF INTERNATIONAL ECONOMICS, September 20, 1996
Posted: 7 Oct 1996
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: 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