Global effects of national fiscal policy in a multi-country growth model with capital accumulation

Abstract

The purpose of this study is to examine dynamic interactions of economic growth, trade patterns and fiscal policies among multiple countries. Basing on the two traditional models in neoclassical growth theory -Uzawa's two-sector growth model and the one-sector neoclassical trade model with capital, this paper proposes a multi-country growth model with public sector and capital accumulation. We show that the motion of the world economy with J-countries is described by a J-dimensional differential equations system. We identify the existence of equilibrium of the global economy and demonstrate effects of changes in some of the fiscal policies. We show that a change in the same policy parameter in the same direction in different economies may have opposite effects on the global economy and the domestic and foreign economies.