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Public debt and relative prices in a cross-section of countries

Vahagn Galstyan and Adnan Velic ()

Review of World Economics (Weltwirtschaftliches Archiv), 2018, vol. 154, issue 2, 229-245

Abstract: Abstract This paper examines the effects of debt and distortionary labor taxation on the long-run behavior of the relative price of nontraded goods. At the theoretical level, in a two-sector open economy model we demonstrate that higher public debt, associated with higher taxation, contracts labor supply in both traded and nontraded goods sectors. Relative prices move inversely with relative supply shifts which, in turn, depend on relative factor intensities. At the empirical level, for a panel of advanced economies, we find statistically significant effects of public debt and taxes on the relative price of nontraded goods, with higher debt and taxes associated with higher relative prices.

Keywords: Labor taxation; Public debt; Government spending; Relative prices (search for similar items in EconPapers)
JEL-codes: F00 F41 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Public Debt and Relative Prices in a Cross-Section of Countries (2016) Downloads
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