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Government Purchases and Relative Prices in a Two‐Country World *
Author(s) -
OSTRY JONATHAN D.
Publication year - 1994
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.1994.tb01834.x
Subject(s) - economics , exchange rate , monetary economics , government spending , government (linguistics) , international economics , fiscal policy , relative price , terms of trade , real interest rate , bond , interest rate , macroeconomics , finance , market economy , welfare , linguistics , philosophy
The effects of government expenditures on the terms of trade, the real exchange rate, and the real interest rate are examined in a three‐goods (importables, exportables, and nontradables), two‐country, inter‐temporal, optimizing model. Temporary spending increases on tradable or nontradable goods may raise or lower the world return on internationally traded bonds and may improve or worsen the current account of the country undertaking the fiscal expansion. The paper's results also shed light on the theoretical determinants of the co‐movement between the terms of trade and the real exchange rate in response to changes in fiscal policies.