Compositional Effects of Government Spending in a Two-Country Two-SectorProduction Model

Steven Durlauf and Robert Staiger

No 2543, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper explores the impact of changes in the composition of government spending on the level of relative prices, interest rates and the current account in a two country, two period Heckacher-Ohlii model. We show that shifting the composition of government spending affects macroeconomic variables according to the relative factor intensities of tradeable and non-tradeable goods. Adjustments of composition towards non-tradeables will raise (lower) world interest rates if non-tradeables are capital (labor) intensive. The announcement of a future shift towards non-tradeables will induce a current account deficit (surplus) if future interest rates are expected to increase (decrease). The introduction of production thus places restrictions on the co-movements of fiscal policy and macroeconomic variables beyond those generated by preferences.

Date: 1988-03
Note: ITI IFM
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Published as Journal of International Economics 1989.

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Journal Article: Compositional effects of government spending in a two-country, two-sector production model (1990)
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