Financial market linkages, fiscal policies and international business cycle

This thesis addresses the following three related questions: what are the macroeconomic implications of unilateral fiscal reforms in an open economy equilibrium model? How well can this model mimic the empirical behavior of developed countries? And what is the extend to which international linkages through financial markets affect the model's cyclical predictions? Throughout this thesis, I maintain a general equilibrium perspective, with intertemporal optimizing individuals, neoclassical investment and endogenous determination of interest rates.;In chapter one, I explore the implications of fiscal policies in an environment with extensive opportunities for international risk sharing. I find that an increase in government spending can not generate a multiplier on output while a reduction in the tax rate on labor income or on capital income has the potential for generating sizable increases in output. Then I subject the model to productivity and fiscal disturbances and estimate population moments between key macroeconomic aggregates. I find that tax disturbances play a major role in shaping the cyclical behavior of the theoretical economy.;The results that fiscal taxation is an especially powerful tool for affecting economic activity motivate the second chapter where I study the ramifications of capital income tax reforms on private economic activity. The key feature of this model is the specification of the behavior of the corporate sector. I find that changes in the tax rate on corporate income, capital gains, dividend income and the rate of investment tax credits have distinct and in some cases opposite effects on the domestic economy. Further, I show that unilateral domestic tax reductions should not necessarily be associated with negative effects on the foreign economy.;In chapter three, I employ recent developments in frequency filters to study the short run and the long run movements of international trade. Further, I investigate the extent to which the dynamics of international trade and the transmission of business cycle across countries are affected by the degree of international financial integration. I find that the structure of the financial markets has important ramifications for the character of international business cycles. Its effects are stronger the lower the elasticity of substitution between domestic and imported goods.