INTERTEMPORAL EFFECTS OF ANTICIPATED MEAS URES OF A STABILIZATION POLICY - A DYNAMIC 2-COUNTRY MODEL

In this paper a dynamic symmetric two-country model of an exchange rat e union is discussed. The model assumes sluggish price adjustment, a j oint exchange rate which is floating against the rest of the world and perfect foresight with respect to the rate of change of the exchange rate and the price level. The short-run and long-run effects of antici pated expansions of the growth rate of money supply and the level of p ublic expenditures are analysed. It is shown that the anticipation of future fiscal expansion in one country of the exchange rate union imme diately leads to a reduction of national income in both countries. At the end of the paper the case of a large currency union is also discus sed.