CROWDING OUT OF PRIVATE AND PUBLIC CAPITAL ACCUMULATION IN AN INTERNATIONAL CONTEXT

The paper analyses the impact of government budget deficits in a two-c ountry genera equilibrium model with imperfect commodity substitution and imperfect capital mobility. Account is taken of optimizing agents, finite lives, capital accumulation, intertemporal budget constraints for governments and private sectors, current account dynamics and floa ting exchange rates. The long-run effects of crowding out of private a nd public capital accumulation are of primary concern in the paper. To satisfy the solvency condition of the governments proportional contro l rules for taxation and public investment are applied. Numerical meth ods are used to trace the effects of a unilateral increase in exhausti ve government spending.