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Fiscal Spending, Relative‐Price Dynamics, and Welfare in a World Economy *
Author(s) -
Ono Yoshiyasu,
Shibata Akihisa
Publication year - 2005
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2005.00500.x
Subject(s) - economics , consumption (sociology) , welfare , asset (computer security) , monetary economics , investment (military) , general equilibrium theory , production (economics) , capital accumulation , small open economy , capital (architecture) , macroeconomics , open economy , terms of trade , overlapping generations model , human capital , market economy , monetary policy , history , social science , computer security , archaeology , sociology , politics , computer science , political science , law , exchange rate
This paper analyzes the dynamics of a 2 × 2 × 2 Heckscher–Ohlin model where foreign asset holdings and capital accumulation are independently determined by optimizing agents. Each country has two production sectors, both of whose products are used for consumption, and an investment sector, which uses one of the two commodities to accumulate real capital. In this setting we examine the effects of fiscal spending on the equilibrium paths of interest rates and prices and each country's lifetime utility. The welfare effect is found to consist of the static terms‐of‐trade effect, the dynamic foreign asset effect and the direct income‐loss effect.