Government Purchases and Relative Prices in a Two-Country World

International Monetary Fund

No 1989/028, IMF Working Papers from International Monetary Fund

Abstract: The effects of government expenditures on interest rates, terms of trade, and real exchange rates are examined in a three-good (importables, exportables, nontradables), two-country, intertemporal, optimizing model. Temporary spending increases (on tradable or nontradable goods) may raise or lower the world return on internationally traded bonds and may improve or worsen the current account of the country undergoing the fiscal expansion. The results are shown to differ substantially from those obtained in models employing a higher degree of commodity aggregation. The determinants of the comovement between the terms of trade and the real exchange rate are also examined.

Keywords: WP; government spending; rate of interest; exchange rate; terms of trade ratio; terms of trade effect; excess demand; real interest rate; substitution effect; Real exchange rates; Terms of trade; Consumption (search for similar items in EconPapers)
Pages: 52
Date: 1989-01-01
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1989/028

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