Structural and Stabilization Aspects of Fiscal and Financial Policy in the Dependent Economy.

The author considers the response of a dependent economy with overlapping generations households to fiscal and financial shocks, an d the influence of alternative budget balancing rules on the response of the system to external shocks. The government spends on traded and nontraded goods, and raises revenue through lump-sum taxes and through a distortionary tax on traded goods production. Even without government budget deficits, choices concerning the composition of public spending and the structure of taxation have important consequences for the real exchange rate, the allocation of production , the level and composition of consumption, and the current account. Copyright 1988 by Royal Economic Society.