Abstract
This paper investigates the international movements in real interest rates and investment spending in response to a temporary fiscal expansion in one country. It is shown that fiscal expansion may lead investment spending to be negatively correlated across countries. This is because real interest rates relevant for investment purposes may move asymmetrically between countries in response to an expansion in fiscal spending. The crucial factors which determine whether or not this occurs are: (a) a transfer criterion which depends upon the spending propensities of the government relative to those of private consumers, and (b) the intertemporal elasticity of substitution in consumption.
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