Working Paper: NBER ID: w1799
Authors: Jacob A. Frenkel; Assaf Razin
Abstract: In recent years the world economy has been subject to large and unsyncronized changes in fiscal policies, high and volatile real rates of tnterest, large fluctuations in real exchange rates, and significant variations in private-sector spending. This paper reviews some of the key facts characterizing the effects of fiscal policies during the first half of the 1980s and provides a simple analytical framework suitable for the interpretation of these facts. The analytical framework builds on a two-country model of the world economy which is applied to the analysis of the transmission and effects of various changes in the time profile of taxes and of government spending. Generally, the predictions of the model concerning the relation among the intercountry patterns of consumption, long and short-term real rates of interest, real exchange rates and fiscal policies are consistent with the stylized facts.
Keywords: fiscal policy; international economics; real interest rates; real exchange rates
JEL Codes: E62; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expansionary fiscal policies in the United States (E62) | Increased real interest rates domestically (E43) |
| Increased real interest rates domestically (E43) | Decreased foreign wealth and consumption (E21) |
| Expansionary fiscal policies in the United States (E62) | Decreased foreign wealth and consumption (E21) |
| Budget deficit arising from a tax cut (H62) | Excess demand for present tradable goods (E41) |
| Excess demand for present tradable goods (E41) | Rise in their intertemporal relative price (E31) |
| Changes in government spending (H59) | Demand for both present and future goods (E41) |
| Demand for both present and future goods (E41) | Altered equilibrium rates of interest (E43) |