The Effects of Industrial Country Fiscal Policies on Developing Countries in the 1980s

Abstract

There has been much empirical macroeconomic research on the current account and fiscal linkages among the industrial countries (e.g. Bryant, Henderson et Al. [6]), but much less empirical analysis using multicountry general equilibrium models of the linkages between the industrial countries (the north) and the developing countries (the south) (1). In this paper, we make use of two recently developed global models, the IMF’s MULTIMOD (Masson, Symansky, et Al. [33]) and INTERMOD (Helliwell, Meredith, et Al. [23]), to spell out some of main channels (2). We shall assess the extent to which fiscal policies in the industrial countries during the first half of the 1980s contributed to the growth, debt, and debt-servicing experience of the developing countries. The fiscal policies of the major industrial countries have received much attention, but primarily as concerns their effects on industrial countries, e.g. on their current balances, exchange rates, and interest rates (Blanchard and Summers [2], Branson [4], Sachs [35], Masson and Knight [32], Helkie and Hooper [21]) (3). Here, the focus is on their impact on developing countries.

This paper is a revised version of one presented to the 1989 Annual Meetings of the Canadian Economics Association. The authors wish especially to thank Philip Bagnoli, Guy Meredith, John Sargent and Steve Symansky for their collaboration in constructing the models used in this paper. We are also grateful of Mohsin Khan and David Vines for discussions on the issues treated here. However, the views expressed are the authors’ alone, and, in particular, do not represent those of the International Monetary Fund.