Fiscal policy, macroeconomic performance and industry structure in a small open economy

Pål Boug, Thomas von Brasch, Ådne Cappelen, Roger Hammersland, Håvard Hungnes, Dag Kolsrud, Julia Skretting, Birger Strøm and Trond C. Vigtel

Journal of Macroeconomics, 2023, vol. 76, issue C

Abstract: We analyse how fiscal policy affects both the macroeconomy and the industry structure, using a multi-sector macroeconomic model of the Norwegian economy with an inflation targeting monetary policy. Our simulations show that the magnitude of the government spending and labour tax cut multipliers, whether monetary policy is active or passive, is comparable to what is found in the literature. A novel finding from our simulations is that the industry structure is substantially affected by an expansionary fiscal policy, as value added in the non-traded goods sector increases at the expense of value added in the traded goods sector. Moreover, expansionary fiscal policy reduces the mark-ups in the traded goods sector, while the mark-ups are roughly unchanged in the non-traded goods sector. The contraction of activity in the traded goods sector increases when monetary tightening accompanies the fiscal stimulus. Hence, we find that such a policy mix is likely to produce significant de-industrialization in a small open economy with inflation targeting.

Keywords: Fiscal policy; Macroeconomy; Industry structure; Model simulations (search for similar items in EconPapers)
JEL-codes: E17 E52 E62 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Fiscal policy, macroeconomic performance and industry structure in a small open economy (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:76:y:2023:i:c:s0164070423000241

DOI: 10.1016/j.jmacro.2023.103524

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