Compositional Effects of Government Spending in a Two-Country Two-Sectorproduction Model

26 Pages Posted: 7 Apr 2004

See all articles by Steven N. Durlauf

Steven N. Durlauf

University of Chicago; National Bureau of Economic Research (NBER)

Robert W. Staiger

Stanford University; University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1988

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.

Suggested Citation

Durlauf, Steven N. and Staiger, Robert W., Compositional Effects of Government Spending in a Two-Country Two-Sectorproduction Model (March 1988). NBER Working Paper No. w2543, Available at SSRN: https://ssrn.com/abstract=425570

Steven N. Durlauf (Contact Author)

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Robert W. Staiger

Stanford University ( email )

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University of Wisconsin - Madison - Department of Economics ( email )

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