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Compositional effects of government spending in a two-country, two-sector production model

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  • Durlauf, Steven N.
  • Staiger, Robert W.

Abstract

This paper explores the impact of changes in the composition of government spending on the level of relative prices, interest rates and the current account in a two country, two period Heckacher-Ohlii model. We show that shifting the composition of government spending affects macroeconomic variables according to the relative factor intensities of tradeable and non-tradeable goods. Adjustments of composition towards non-tradeables will raise (lower) world interest rates if non-tradeables are capital (labor) intensive. The announcement of a future shift towards non-tradeables will induce a current account deficit (surplus) if future interest rates are expected to increase (decrease). The introduction of production thus places restrictions on the co-movements of fiscal policy and macroeconomic variables beyond those generated by preferences.
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  • Durlauf, Steven N. & Staiger, Robert W., 1990. "Compositional effects of government spending in a two-country, two-sector production model," Journal of International Economics, Elsevier, vol. 28(3-4), pages 333-347, May.
    • Handle: RePEc:eee:inecon:v:28:y:1990:i:3-4:p:333-347
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    1. Sajid Anwar, 1993. "International transmission of government spending on industries," Open Economies Review, Springer, vol. 4(3), pages 287-301, September.
    2. Sajid Anwar, 1997. "International Transmission of Government Spending, Monopolistic Competition and North-South Trade," International Economic Journal, Taylor & Francis Journals, vol. 11(4), pages 113-126.

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