Fiscal policy and the international business cycl

In this thesis we develop stochastic general equilibrium models of the world economy. They differ from previous models due to the introduction of the government sector. This simple modification helps explain the low cross-country correlations in private consumption and output, and countercyclical trade balances that are observed empirically.;In our first model we assume that countries produce nonspecialized traded goods. We obtain these favorable results by assuming that households' derive utility from the consumption of private and public goods and services. This will imply that cross-country composite consumption will be highly correlated but private consumption may have a much lower correlation.;We introduce countries that produce specialized traded goods in the second model we develop in this thesis. Government spending affects the world economy through its impact on the temporal and intertemporal terms of trade. Aggregate consumption depends on the relative price of foreign goods in terms of domestic goods. Fluctuations in the terms of trade play an important role in pooling national economic risks. The fact that aggregate consumption depends on the terms of trade reduces the cross-country correlations in private consumption.;We introduce a non-traded sector in our final model. This model is most successful in replicating the "stylized facts" of the international business cycle. It also highlights a possible reason for the failure of one-sector models to reproduce the observed large fluctuations in hours worked relative to productivity.;Characteristics of the international real business cycle in the theoretical economy are compared to the actual data from the Group of Seven countries. The intuition for some of the results is made clear by examining the impulse response functions of macroeconomic variables following once-and-for-all standard deviation shocks to productivity and government spending.