Fiscal policies and the integrated world stock market

The paper develops a two-country stochastic model of an integrated world stock market in order to address issues concerning the effects of tax and spending policies on savings, asset portfolios, and stock-market valuations. General conditions for government-finance neutrality under uncertainty are derived and the characteristics of the international transmission of uncertain future spending policies are spelled out. They are shown to depend precisely on a transfer-problem criterion involving the government and the private-sector propensities to spend in different states of nature and on the cross-country correlations between shocks to productivity and public spending.