Fiscal Policy, Net Exports, and the Sectoral Composition of Output in Greece

Abstract

This paper investigates the effects of fiscal policy shocks on net export performance and the sectoral composition of output in Greece in the post 2000 period. A reduction in government spending (or a tax hike) exerts a negative response on output which reduces import demand. A cut back in government spending boosts exports through the labour cost competitiveness channel further improving net exports. Tax hikes in particular on social security contributions and other indirect taxes reduce export performance. Although real aggregate output declines following a cut in government spending, the tradable sector output responds positively, further improving net exports.

Keywords: Fiscal policy; net exports; tradable; non-tradable

JEL Classification: E62, E24, O52, H30