Government Spending, Distortionary Taxation and the International Transmission of Business Cycles
Maria Olivero ()
Journal of Economic Integration, 2010, vol. 25, pages 403-426
We study the international transmission of aggregate TFP shocks by introducing demand-side shocks to government spending into an otherwise standard DSGE two-country, two-good model. In the model the substitutability in consumption between private and public goods works to limit international risk sharing. Further, the distortive taxation used to finance the provision of public goods works to increase the correlation of employment, investment and output across countries relative to standard models that lack this friction. In the quantitative analysis we can bring the predictions of the theory closer to the observed properties of the data on the comovement of macroeconomic variables between the United States and other OECD countries. We are also able to provide a potential explanation to some of the puzzles in the international RBC literature, as identified by Backus, Kehoe and Kydland (1992). The topic we study is fundamentally relevant and timely at a time when the crisis in the United States has spread to several other countries in the developed world, forcing governments to engage in active fiscal policy to help their economies in recession.
Keywords: International RBC; Fiscal Policy; Demand-side Shocks (search for similar items in EconPapers)
JEL-codes: F41 F42 (search for similar items in EconPapers)
References: Add references at CitEc
Citations Track citations by RSS feed
There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:ris:integr:0510
Access Statistics for this article
Journal of Economic Integration is currently edited by Jong-Eun Lee
More articles in Journal of Economic Integration from Center for Economic Integration, Sejong University
Contact information at EDIRC.
Series data maintained by Jong-Eun Lee ().