The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
The effects of government expenditures on interest rates, terms of trade, and real exchange rates are examined in a three-good (importables, exportables, nontradables), two-country, intertemporal, optimizing model. Temporary spending increases (on tradable or nontradable goods) may raise or lower the world return on internationally traded bonds and may improve or worsen the current account of the country undergoing the fiscal expansion. The results are shown to differ substantially from those obtained in models employing a higher degree of commodity aggregation. The determinants of the comovement between the terms of trade and the real exchange rate are also examined.