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A study was conducted on the effects of fiscal policies on a large economy's external balance and its terms of trade. The external balance is the difference between the change in the ownership of wealth among the citizens of each country and the change in the dissemination of world wealth in terms of each country's assets. Results show that an increase in government spending on imported goods lessens the country's terms of trade but enhances its net foreign asset position.

The portfolio balance channel for sterilised intervention is tested by examining the effects of changes in relative asset supplies on the dollar-Deutschemark rate during the 1980s. In contrast to previous studies, we control for any signalling effects of central bank intervention and find a weak, but statistically significant, portfolio balance influence on the exchange rate.

We show that uncertainty about the effects of economic policies, far from precluding international macroeconomic policy coordination, may actually provide an additional incentive to coordinate policies. Using 11 global macroeconomic models we find that the welfare gains from coordination which arise solely from the existence of model uncertainty are of roughly the same magnitude as those identified in the standard literature.