CROWDING OUT OF PRIVATE AND PUBLIC CAPITAL ACCUMULATION IN AN INTERNATIONAL CONTEXT

The paper analyses the impact of government budget deficits in a two-country genera equilibrium model with imperfect commodity substitution and imperfect capital mobility. Account is taken of optimizing agents, finite lives, capital accumulation, intertemporal budget constraints for governments and private sectors, current account dynamics and floating exchange rates. The long-run effects of crowding out of private and public capital accumulation are of primary concern in the paper. To satisfy the solvency condition of the governments proportional control rules for taxation and public investment are applied. Numerical methods are used to trace the effects of a unilateral increase in exhaustive government spending.