Government Spending and Real Interest Rate in an Open Economy

Wen-Ya Chang and Hsueh-Fang Tsai

Review of International Economics, 1998, vol. 6, issue 2, 284-91

Abstract: This paper investigates the dynamic effect of government spending in an optimizing monetary model of an open economy with capital immobility and fixed exchange rates. It is found that a rise in government spending will always lead to a reduction in real interest rates on impact. Moreover, real interest rates can be lower during temporary periods of high government spending. This result is compatible with the observation of low real interest rates during wars. Copyright 1998 by Blackwell Publishing Ltd.

Date: 1998
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