Government Deficit, Real Exchange Rate and International Transmission.

This paper develops a two country-two goods, full intertemporal optimization model, which allows for short-r un wage rigidity, to analyze the relationship between deficit spendin g, real exchange rate, and intertemporal terms of trade, as well as t he international transmission of fiscal policy. It shows that deficit spending abroad unambiguously improves employment and investment abr oad, induces unemployment, and crowds out investment at home. Copyright 1988 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research