Title: Effects of budgetary policies in open economies: The role of intertemporal consumption substitution
Abstract: An economy's optimal response to temporary and anticipated future changes in government spending is examined in the context of a two-country model which highlights the role of intertemporal consumption substitution (ICS). Special attention is devoted to the case in which the two countries coordinate their fiscal measures. The qualitative effects of such measures on an economy's current account, terms of trade (in a two-commodity world), and real exchange and interest rates (in a world with non-traded goods) are shown to depend on the relationship between the domestic and the foreign elasticities of ICS.