Fiscal policy in a simple two-country dynamic model

Bianconi, Marcelo

doi:10.1016/0165-1889(93)00787-5

“…2 With this felicity function, consumer preferences display adjacent complementarity, wherein an increase in today's habits increases the marginal utility of today's consumption more than it increases marginal disutility of habits, thereby, ceteris paribus, enlarging today's optimal consumption. To be formal, Ryder and Heal (1973) de…ne adjacent complementarity as the felicity function satisfying u cz (c; c) + +2 u zz (c; c) > 0: To capture the intertemporal complementarity, de…ne as u cz + +2 u zz =u cc .…”

Section: The Basic Frameworkmentioning

confidence: 99%

Global Habits, Habit Differentials, and International Macroeconomic Adjustment to Income Shocks

Ikeda

¹

,

Gombi

²

2010

SSRN Journal

0

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn a two-country model with habit formation, we focus on interdependent macroeconomic adjustments to global and country-specific income shocks. Global habits and habit differentials play key roles in the global equilibrium dynamics, possibly nonmonotonic, and in the determination of international asset distribution. A country's steady-state holdings of net external assets rely on (i) weighted income difference in excess of habit differentials and (ii) global income in excess of global habits. Local income shocks have greater effects on the international asset distribution than global income shocks. With habit formation, positive income shocks lower the world interest rate, thereby harming the creditor country and benefitting the debtor country due to the intertemporal terms-of-trade effect. In contrast to the case of trade theory, this intertemporal immiserizing growth effect is more likely to be caused by global income shocks than by country-specific income shocks. JEL Classification Numbers: F41, D90.

show abstract

“…By contrast, fiscal spending in our habit forming economy can make the policy implementing country better off by improving the intertemporal terms of trade, even when the policy is financed by lump-sum taxation in a single good economy. 2 The remainder of the paper is structured as follows: In Section 2, we present a two-country model. In Section 3, we examine equilibrium dynamics of consumption, the interest rate, and net foreign assets.…”

Section: Introductionmentioning

confidence: 99%

“…By using a two-country model, Bianconi (2003) exhibits the possibility that an increase in fiscal spending has a reversed immiserizing growth effect due to changes in the intratemporal terms of trade. He shows that an increase in a country's fiscal spending financed by capital taxation contracts the production frontier in that country, and thereby appreciates the real exchange rate, which can improve the asset position and the welfare level.…”

Section: Introductionmentioning

confidence: 99%

Habit Formation in an Interdependent World Economy

Ikeda

¹

,

Gombi

²

2004

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 1 We are grateful to Gregory Bauer, Leonald Cheng, Charles Johnston, Atsushi Kajii, Kazuo Mino, Akihisa Shibata, and the participants of the 7th International Meeting of the Society for Social Choice and Welfare (Osaka, Japan), the 79th WEAI Conference (Vancouver, Canada), the 57th IAEC meeting (Lisbon, Portugal), the JEA Spring meeting (Meiji-Gakuin University, Tokyo), and the seminars at Kyoto, Osaka, and Ritsumeikan Universities. We appreciate financial supports from Grants-in-Aid for Scientific Research (C No. 1553021) from the Japan Society for the Promotion of Science. Terms of use: Documents in2 Corresponding author: S. Ikeda, The Institute of Social and Economic Research, Osaka University, Mihogaoka, Ibaraki, Osaka 567-0047, Japan. Telephone: 81-6-6879-8568, Facsimile: 81-6-6878-2766, Email: . 3 I. Gombi, The Faculty of Economics, Ritsumeikan University, Kusatsu, Shiga 525-8577 Japan. Telephone: 81-77-561-4840, Email: . MSO-04-09-02Abstract Economic interdependence of heterogeneous habit forming consumers is examined by using a two-country model. Due to endogenous interest rate adjustments, consumption-habit dynamics in one country are affected by the other country's habits and preferences. To characterize the interactive dynamics, we construct an aggregate world felicity function from individual countries' felicity functions and introduce a global aggregate habit capital, defined as the sum of individual countries' habit capitals. External indebtedness depends crucially on international differences in habit-adjusted disposable income less habitual living standard. The international average of, and difference in, the strength of habit formation play a key role in macroeconomic adjustment and the effects of fiscal policies. An increase in fiscal spending in one country can make that country better off, and the neighbor worse off, due to intertemporal terms-of-trade effects. JEL Classification Numbers: F41, D90.

show abstract

“…Most of the open-economy two-sector growth models can neither be used for the present analysis since they ignore international trade in financial assets, causing a saving tax to be equivalent to an investment tax. 4 See Chapter 2 of Frenkel, Razin and Sadka (1991) and Chapter 6 of Turnovsky (1997) for more detailed explanations on the economic implications of the residence and source principles. See also Iwamoto and Shibata (1999) for the deviations of the actual tax systems from the two principles.…”

Section: Introductionmentioning

confidence: 99%

“…sidered; one is the residence principle and the other is the source principle. 4 Under the former principle the home country's government applies a uniform tax rate to residents' income from capital regardless of where the capital is located. It however imposes no tax on nonresidents' income from capital even if it is located in the home country.…”

Section: Introductionmentioning

confidence: 99%

Capital Income Taxation and Specialization Patterns: Investment Tax vs. Saving Tax

Ono

¹

,

Shibata

²

2006

SSRN Journal

0

View full text Add to dashboard Cite

Unless free international lending/borrowing is allowed, domestic saving equals domestic investment and hence saving and investment taxes have the identical effect, as is the case in a closed-economy context. However, if it is allowed, households can accumulate foreign assets besides domestic capital and hence saving and investment are separated, causing the two taxes to have different effects. Using a two-sector growth model, we show that the two taxes generate completely different effects on industrial structure. The investment tax always shrinks the capital-intensive sector whereas the saving tax may well expand it.

show abstract

Fiscal policy in a simple two-country dynamic model

Cited by 18 publications

References 24 publications

Global Habits, Habit Differentials, and International Macroeconomic Adjustment to Income Shocks

Global Habits, Habit Differentials, and International Macroeconomic Adjustment to Income Shocks

Habit Formation in an Interdependent World Economy

Capital Income Taxation and Specialization Patterns: Investment Tax vs. Saving Tax

Contact Info

Product

Resources

About