Three essays on issues in open macroeconomies

The first essay (joint with Paul Zak) analyzes aggregate and generational effects of the U.S. fiscal policies. A two country overlapping generations model with capital and government debt is derived and calibrated to identify the mechanisms which relate fiscal policies, public debt, and external debt. A demographic structure is included in each country in which consumers have uncertain but finite lifetimes. A primary result from the simulations is that a 20% reduction in government spending and public debt will add.2% per year to the long run GDP and will reduce the U.S. external debt by 25%. In addition, the model shows that a reduction in the U.S. public debt will not result in a decrease in the external debt unless accompanied by government spending cuts. The second essay investigates the effects of the terms of trade on the real trade balance using recent quarterly U.S. data over 1971:1-1990:3. The standard and structural vector autoregression methods are applied to a system consisting of the first differences of government consumption, foreign GDP, home GDP, terms of trade, and the trade balance. Variance decompositions and impulse responses imply that an improvement in the terms of trade will worsen the trade balance. The effect in the short run is negative, and the typical J-curve performance of the real trade balance is not observed. Finally in the third essay (joint with Tamim Bayoumi) the empirical relationship between the fiscal and the current account deficits is studied using a data set comprising 18 OECD countries. Despite a wide diversity of experience across countries, there is strong evidence of a positive relationship, with a dollar rise in the budget deficit being associated on average with a 25 cent rise in the current account deficit. The level of government consumption also has a separate and additional effect on the current account. Cross-country analysis indicates that the size of the underlying correlation depends, among other factors, on the permanence of the fiscal change; this implies that the effect of fiscal deficits on the current account depends heavily on perceptions of future behavior