Fiscal Shocks in a Two Sector Open Economy

Olivier Cardi and Romain Restout ()

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Abstract: We use a two-sector neoclassical open economy model with traded and non-traded goods to investigate both the aggregate and the sectoral e®ects of temporary ¯scal shocks. One central ¯nding 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 em- pirical 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 ¯s- cal 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 ¯rm 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)
Date: 2011-02
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00812166
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Citations: View citations in EconPapers (4)

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Related works:
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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