This paper studies four classic fiscal-policy experiments within a quantitatively restricted neoclassical model. Our main findings are as follows: (i) permanent changes in government purchases can lead to short-run and long-run output multipliers that exceed 1; (ii) permanent changes in government purchases induce larger effects than temporary changes; (iii) the financing decision is quantitatively more important than the resource cost of changes in government purchases; and (iv) public investment has dramatic effects on private output and investment. These findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy.

National saving and investment rates are highly positively correlated in virtually all countries. This is puzzling, as it apparently implies a low degree of international capital mobility. This paper shows that the observed positive correlation between national saving and investment rates arises naturally within a quantitatively restricted equilibrium model with perfect mobility of financial and physical capital. The model is consistent with the fact that saving--investment correlations are larger for larger countries but are still substantial for small countries. Further, the model is consistent with the finding that current-account deficits tend to be associated with investment booms.

National saving and investment rates are highly positively correlated in virtually all countries. This is puzzling, as it apparently implies a low degree of international capital mobility. This paper shows that the observed positive correlation between national saving and investment rates arises naturally within a quantitatively restricted equilibrium model with perfect mobility of financial and physical capital. The model is consistent with the fact that saving-investment correlations are larger for larger countries but are still substantial for small countries. Further, the model is consistent with the finding that current-account deficits tend to be associated with investment booms.