Fiscal Shocks in a Two-Sector Open Economy

Olivier Cardi and Romain Restout ()
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Romain Restout: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)

No 2011006, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We use a two-sector neoclassical open economy model with traded and non-traded goods to investigate both the aggregate and the sectoral effects of temporary fiscal shocks. One central finding is that both sectoral capital intensities and labor supply elasticity matter in determining the response of key economic variables. In particular, the model can produce a drop in investment and in the current account, in line with empirical evidence, only if the traded sector is more capital intensive than the non-traded sector, and labor is supplied elastically. Irrespective of sectoral capital intensities, a fiscal shock raises the relative size of the non-traded sector substantially in the short-run. Additionally, allowing for the markup to depend on the number of competitors, the two-sector model can produce the real exchange rate depreciation found in the data. Finally, markup variations triggered by firm entry modify substantially the response of the real wage and the sectoral composition of GDP in the short-run.

Keywords: Non-traded Goods; Fiscal Shocks; Investment; Current Account (search for similar items in EconPapers)
JEL-codes: E22 E62 F32 F41 (search for similar items in EconPapers)
Pages: 33
Date: 2011-02-21
New Economics Papers: this item is included in nep-cba, nep-dge and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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http://sites.uclouvain.be/econ/DP/IRES/2011006.pdf (application/pdf)

Related works:
Working Paper: Fiscal shocks in a two sector open economy (2011)
Working Paper: Fiscal Shocks in a Two Sector Open Economy (2011)
Working Paper: Fiscal Shocks in a Two Sector Open Economy (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2011006

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