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Title: Channels of International Policy Transmission

Author(s): Frederick van der Ploeg

Publication Date: January 1991

Keyword(s): Finite Lives, Intra- and Inter-Temporal Substitution, Revaluation Effects and Spillovers

Programme Area(s): International Macroeconomics

Abstract: A two-country, intertemporal, perfect-foresight model with micro foundations, floating exchange rates, uncovered interest parity, and nominal wage rigidities is formulated. The benchmark case corresponds to unit elasticities of intertemporal and intratemporal substitution in consumption, no initial holdings of foreign assets and infinite lifetimes. Monetary disinflation and an increase in government spending then have no spillover effects on foreign consumption and employment and there are no current account dynamics. Four channels of international policy transmission are then analysed. The first is based on capital gains on holdings of foreign assets. The spillover effects arising through the second and third channel depend on whether goods are gross substitutes or gross complements and on whether the elasticity of intertemporal substitution is less or greater than unity. The final channel assumes finite lifetimes and no bequest motive. It departs from debt neutrality in order to allow wealth effects and current account dynamics to play a more interesting role and to assess the difference between tax and debt finance.

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Bibliographic Reference

van der Ploeg, F. 1991. 'Channels of International Policy Transmission'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=491