Openness and the Sectoral Effects of Fiscal Policy

Tommaso Monacelli and Roberto Perotti

Journal of the European Economic Association, 2008, vol. 6, issue 2-3, 395-403

Abstract: Based on structural VAR evidence for the U.S., we document that a rise in government spending generates three facts: (1) an appreciation of the terms of trade; (2) a fall in the price of traded vs. non-traded goods (proxied by the price of goods relative to services), and (3) a positive co-movement between the manufacturing and the service sector, both in consumption and production. We show that, even if government spending is assumed to be as intensive in goods and services as households' consumption, the relative price behavior can be explained as a simple implication of trade openness. However, a baseline open-economy business-cycle model has problems in rationalizing simultaneously the sectoral co-movement of quantities and the behavior of relative prices. This anomaly is enhanced if government spending is assumed to be intensive in non-traded goods. (JEL: E52, F41, E62) (c) 2008 by the European Economic Association.

JEL-codes: E52 E62 F41 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (63)

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Journal of the European Economic Association is currently edited by Xavier Vives, George-Marios Angeletos, Orazio P. Attanasio, Fabio Canova and Roberto Perotti

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