Working Paper: NBER ID: w2725
Authors: Maurice Obstfeld
Abstract: This paper studies the transmission of fiscal disturbances between countries, and the effect of those disturbances on worldwide capital intensity, in a context of growth. The model developed to address these issues allows for the production of both nontradable and relatively capital-intensive tradable goods; a central finding is that factor markets can be a major channel for the communication of fiscal policy shocks to world interest rates, to private saving decisions, and, ultimately, to global asset supplies and their distribution among countries. Particular predictions of the model illustrate how changes in public debt ratios and shifts in government spending patterns affect resource allocation and welfare. For example, an increase in a small country's per capita public debt leads to long-run crowding-in of capital and the impoverishment of future generations; a similar policy shift by a large country crowds out capital on a global scale, impoverishes future domestic generations, and has ambiguous effects abroad.
Keywords: Fiscal Deficits; Capital Intensity; International Economics
JEL Codes: E62; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| an increase in a small country's per capita public debt (H69) | long-run crowding-in of capital (E22) |
| long-run crowding-in of capital (E22) | reduced per capita consumption (D12) |
| reduced per capita consumption (D12) | impoverishment of future generations (H60) |
| an increase in public debt by a large country (H63) | crowding out of capital on a global scale (F65) |
| crowding out of capital on a global scale (F65) | effects on interest rates (E43) |
| government purchases of nontradables (H59) | lower world capital stocks (E22) |
| government purchases of nontradables (H59) | lower consumption compared to equivalent purchases of tradables (D12) |