Fiscal Policy and Business Formation in Open Economies

34 Pages Posted: 4 Sep 2015

See all articles by Vivien Lewis

Vivien Lewis

Research Centre; KU Leuven

Roland Winkler

Dortmund University, Faculty of Business, Economics, and Social Sciences,

Date Written: August 10, 2015

Abstract

According to empirical evidence, expansionary government spending policies increase consumption and the number of active firms in an economy and have large positive international spillover effects. Using a two-country sticky-price model with a variable number of producers, we analyze movements in output, consumption, extensive-margin investment and foreign output in response to government spending expansions. Our baseline results show that, first, there is divergence between consumption and firm entry; and second, spillovers are generally small. A large share of imports in government spending or a high trade elasticity can generate large spillovers in the model, but do not induce consumption-investment comovement. We propose useful government spending as a device to induce both large spillovers and positive consumption-investment comovement.

Keywords: consumption-investment comovement, firm entry, government spending, international spillovers.

JEL Classification: E62, F42.

Suggested Citation

Lewis, Vivien and Winkler, Roland, Fiscal Policy and Business Formation in Open Economies (August 10, 2015). Available at SSRN: https://ssrn.com/abstract=2655592 or http://dx.doi.org/10.2139/ssrn.2655592

Vivien Lewis (Contact Author)

Research Centre ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

KU Leuven ( email )

Oude Markt 13
Leuven, 3000
Belgium

Roland Winkler

Dortmund University, Faculty of Business, Economics, and Social Sciences, ( email )

United States

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