Fiscal policy and business formation in open economies

Vivien Lewis and Roland Winkler ()

No 504890, Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: According to empirical evidence, expansionary government spending policies increase consumption and the number of active firms in an economy and have large positive international spillover effects. Using a two-country sticky-price model with a variable number of producers, we analyze movements in output, consumption, extensive-margin investment and foreign output in response to government spending expansions. Our baseline results show that, first, there is divergence between consumption and firm entry; and second, spillovers are generally small. A large share of imports in government spending or a high trade elasticity can generate large spillovers in the model, but do not induce consumption-investment comovement. We propose useful government spending as a device to induce both large spillovers and positive consumption-investment comovement.

Date: 2015-08
Note: paper number DPS 15.16
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Published in CES - Discussion paper series,, pages 1-34

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Journal Article: Fiscal policy and business formation in open economies (2015)
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