The International Transmission and Effects of Fiscal Policies

In recent years the world economy has been subject to large and unsyncronized changes in fiscal policies, high and volatile real rates of tnterest, large fluctuations in real exchange rates, and significant variations in private-sector spending. This paper reviews some of the key facts characterizing the effects of fiscal policies during the first half of the 1980s and provides a simple analytical framework suitable for the interpretation of these facts. The analytical framework builds on a two-country model of the world economy which is applied to the analysis of the transmission and effects of various changes in the time profile of taxes and of government spending. Generally, the predictions of the model concerning the relation among the intercountry patterns of consumption, long and short-term real rates of interest, real exchange rates and fiscal policies are consistent with the stylized facts.