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Public Debt and Relative Prices in a Cross-Section of Countries

Vahagn Galstyan and Adnan Velic ()

Economic Papers from Trinity College Dublin, Economics Department

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)
New Economics Papers: this item is included in nep-opm
Date: 2016-06, Revised 2016-07
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Journal Article: Public debt and relative prices in a cross-section of countries (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:tcd:tcduee:tep0816

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