Fiscal Deficits and Relative Prices in a Growing World Economy

Maurice Obstfeld

No 2725, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the transmission of fiscal disturbances between countries, and the effect of those disturbances on worldwide capital intensity, in a context of growth. The model developed to address these issues allows for the production of both nontradable and relatively capital-intensive tradable goods; a central finding is that factor markets can be a major channel for the communication of fiscal policy shocks to world interest rates, to private saving decisions, and, ultimately, to global asset supplies and their distribution among countries. Particular predictions of the model illustrate how changes in public debt ratios and shifts in government spending patterns affect resource allocation and welfare. For example, an increase in a small country's per capita public debt leads to long-run crowding-in of capital and the impoverishment of future generations; a similar policy shift by a large country crowds out capital on a global scale, impoverishes future domestic generations, and has ambiguous effects abroad.

Date: 1988-10
Note: ITI IFM
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Citations: View citations in EconPapers (31)

Published as Journal of Monetary Economics, Vol. 23, No.3, pp. 461-484, (May 1989).

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Journal Article: Fiscal deficits and relative prices in a growing world economy (1989)
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