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On Fiscal Deficits, the Real Exchange Rate and the World Rate of Interest

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  • van Wijnbergen, Sweder

Abstract

We use a full general equilibrium 2-country, 2-period model with perfect capital markets, and intertemporal optimization and perfect foresight underlying private consumer behaviour in both countries to analyse the effects of pure fiscal policy. We demonstrate that higher government budget deficits in one country caused by a cut in commodity taxes today balanced by an equal present value increase tomorrow, will not be offset one for one by higher private savings, because of pure substitution effects triggered by the change in the intertemporal terms of trade the tax change causes.

Suggested Citation

  • van Wijnbergen, Sweder, 1984. "On Fiscal Deficits, the Real Exchange Rate and the World Rate of Interest," CEPR Discussion Papers 21, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:21
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    References listed on IDEAS

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    1. Marion, Nancy Peregrim & Svensson, Lars E O, 1984. "World Equilibrium with Oil Price Increases: An Intertemporal Analysis," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 86-102, March.
    2. Martin Feldstein, 1984. "Why the Dollar Is Strong," Challenge, Taylor & Francis Journals, vol. 26(6), pages 37-41, January.
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    Cited by:

    1. Lans Bovenberg, A., 1993. "Investment-promoting policies in open economies : The importance of intergenerational and international distributional effects," Journal of Public Economics, Elsevier, vol. 51(1), pages 3-54, May.
    2. Frenkel, Jacob A & Razin, Assaf, 1987. "Fiscal Policies and the World Economy; An Intertemporal Approach (Cambridge, Mass.: MIT Press, 1987)," MPRA Paper 20438, University Library of Munich, Germany.
    3. Jacob Frenkel & Assaf Razin & Efraim Sadka, 1991. "International Taxation in an Integrated World," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061430, April.
    4. Jacob Frenkel & Assaf Razin, 1996. "Fiscal Policies and Growth in the World Economy," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262561042, April.
    5. Omar Masood & Manuela Tvaronavičienė & Kiran Javaria, 2019. "Impact of oil prices on stock return: evidence from G7 countries," Post-Print hal-02163013, HAL.
    6. Bovenberg, A.L., 1994. "Investment-promoting policies in open economies : The importance of intergenerational and international distributional effects," Other publications TiSEM be140a39-7a76-4f99-8a61-2, Tilburg University, School of Economics and Management.
    7. Song, Chi-Young, 1997. "The Real Exchange Rate and the Current Account Balance in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 11(2), pages 143-184, June.
    8. Bovenberg, A.L., 1992. "Investment-promoting policies in open economies : The importance of intergenerational and international distributional effects," Other publications TiSEM 7414cef6-2f74-4870-bb60-8, Tilburg University, School of Economics and Management.
    9. A. Lans Bovenberg, 1992. "Residence-and source-based taxation of capital income in an overlapping generations model," Journal of Economics, Springer, vol. 56(3), pages 267-295, October.

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    Keywords

    Budget Deficit; Fiscal Policy;

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