Fiscal Policy and Business Formation in Open Economies
34 Pages Posted: 4 Sep 2015
Date Written: August 10, 2015
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: Suggested Citation