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Title: On Fiscal Deficits, the Real Exchange Rate and the World Rate of Interest

Author(s): Sweder van Wijnbergen

Publication Date: July 1984

Keyword(s): Budget Deficit and Fiscal Policy

Programme Area(s): International Macroeconomics and International Trade and Regional Economics

Abstract: We use a full general equilibrium 2-country, 2-period model with perfect capital markets, and intertemporal optimization and perfect foresight underlying private consumer behaviour in both countries to analyse the effects of pure fiscal policy. We demonstrate that higher government budget deficits in one country caused by a cut in commodity taxes today balanced by an equal present value increase tomorrow, will not be offset one for one by higher private savings, because of pure substitution effects triggered by the change in the intertemporal terms of trade the tax change causes.

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Bibliographic Reference

van Wijnbergen, S. 1984. 'On Fiscal Deficits, the Real Exchange Rate and the World Rate of Interest'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=21