Fiscal Policies and the Terms of Trade in an Endogenous Growth Model with Overlapping Generations

The paper investigates how changes in fiscal policy can affect relative prices, composition of private consumption, growth and welfare in a two-country, overlapping generations model of endogenous growth. We develop a simple framework that combines Blanchard-type consumers with uncertain lifetimes with an endogenous growth model a la Romer, in which there are production externalities from the capital stock of other firms at home and abroad. The basic insight is to highlight, within an optimizing set-up, the growth and terms of trade effects of fiscal policies, with emphasis on welfare considerations