International Effects of Government Expenditure in Interdependent Economies

Marcelo Bianconi and Stephen J Turnovsky

Canadian Journal of Economics, 1997, vol. 30, issue 1, 57-84

Abstract: A dynamic analysis of the international transmission of government expenditure shocks under alternative methods of finance is presented. The benchmark case of lump-sum tax financing yields an expansion in both the short-run and the long-run levels of domestic activity, while crowding out domestic consumption. Activity abroad declines in the short run and, while it is stimulated during the transition, long-run activity abroad also declines. With capital income tax financing, the accompanying distortion outweighs the direct expenditure effects, so that all these responses are reversed. Financing with a tax on labor produces ambiguous responses. The welfare implications of these policies are also examined.

Date: 1997
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