The Impacts of the Fiscal-Consolidation Policies in Developed Economies Under the Free Trade Agreements: A Preliminary Report

Abstract

This paper clarifies the impacts of the fiscal-consolidation policies in developed economies when the economies are involved in a Free Trade Agreement (FTA), using a perfect-foresight dynamic Applied General Equilibrium (AGE) model of global trade since some macroeconomic policies which cannot be captured in a static framework. The model in this paper solves for the set of inter- and intratemporally consistent prices, and we obtained the following results. First, the response of the global economy to the fiscal-consolidation policies in high-income countries would be crucial, and the increase in the foreign capital inflow is directly related to the welfare gain. Second, there would be no negative effect of the fiscal-consolidation policies in developed countries on lower income economies. Finally, an additional implementation of traiff liberalization to the fiscal-consolidation policies may raise the growth rate of not only low-income countries, but also middle-income ones. © 1998, JAPAN SECTION OF THE REGIONAL SCIENCE ASSOCIATION INTERNATIONAL. All rights reserved.