Goods markets integration and fiscal policy: A two-country two-sector analysis

Abstract

A two-country two-sector model with a portfolio choice between money and highly substitutable domestic and foreign bonds, floating exchange rates and perfect foresight is presented. Account is taken of capital accumulation, government debt and current account dynamics. Numerical methods, including extensive sensitivity analysis, are used to trace the consequences of goods market integration for the effects and spill over effects of fiscal policy. Another purpose is to establish the relevance of disaggregation for the outcomes of fiscal policy.