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Government Purchases and Relative Prices in a Two‐Country World

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  • JONATHAN D. OSTRY

Abstract

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.

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  • Jonathan D. Ostry, 1994. "Government Purchases and Relative Prices in a Two‐Country World," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 149-161, June.
    • Handle: RePEc:bla:ecorec:v:70:y:1994:i:209:p:149-161
    DOI: 10.1111/j.1475-4932.1994.tb01834.x
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    References listed on IDEAS

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    1. Jacob A. Frenkel & Assaf Razin, 1986. "Fiscal Policies and Real Exchange Rates in the World Economy," NBER Working Papers 2065, National Bureau of Economic Research, Inc.
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    8. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
    9. Peter R. Hartley & Albert S. Kyle, 1988. "Real Interest Rates and Home Goods: A Two‐Period Model," The Economic Record, The Economic Society of Australia, vol. 64(3), pages 168-177, September.
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