Government Expenditure and the Balance of Payments: Budget Deficit, Financial Integration, and Economic Diplomacy

Hiroshi Shibuya

ビジネス創造センターディスカッション・ペーパー (Discussion papers of the Center for Business Creation) from Otaru University of Commerce

Abstract: This paper studies the international and intertemporal implications of increased government expenditure. First, it reviews the conventional proposition that increased government expenditure raises interest rates, crowds out investment, and reduces growth. Then, it shows that this proposition does not necessarily hold in an open economy with integrated international capital markets. This creates a possibility of the strategic intertemporal macroeconomic policy, which minimizes the adverse effects of increased government expenditure on macroeconomic performance. In particular, a country can use economic diplomacy in such a way that government expenditure does not affect its interest rate and potential national income. It offers a new interpretation of the U.S. macroeconomic policy and economic diplomacy toward Japan in the 1980s and 1990s.

Keywords: government expenditure; balance of payments; financial integration; economic diplomacy; U.S.-Japan economic relations; twin deficits (search for similar items in EconPapers)
Pages: 21 pages
Date: 1996-11
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Published in Discussion paper series (1996), 35: 1-21

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Persistent link: https://EconPapers.repec.org/RePEc:ota:busdis:10252/4213

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