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Public debt and relative prices in a cross-section of countries

Author

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  • Vahagn Galstyan

    (Trinity College Dublin)

  • Adnan Velic

    (Dublin Institute of Technology)

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.

Suggested Citation

  • Vahagn Galstyan & Adnan Velic, 2018. "Public debt and relative prices in a cross-section of countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(2), pages 229-245, May.
    • Handle: RePEc:spr:weltar:v:154:y:2018:i:2:d:10.1007_s10290-018-0306-8
    DOI: 10.1007/s10290-018-0306-8
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    Cited by:

    1. Vahagn Galstyan & Adnan Velic, 2017. "Taxation, Debt and Relative Prices in the Long Run: The Irish Experience," The Economic and Social Review, Economic and Social Studies, vol. 48(3), pages 231-251.
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    3. Curran, Michael & Velic, Adnan, 2019. "Real exchange rate persistence and country characteristics: A global analysis," Journal of International Money and Finance, Elsevier, vol. 97(C), pages 35-56.
    4. Florian Morvillier, 2020. "Robustness of the Balassa-Samuelson effect: evidence from developing and emerging economies," EconomiX Working Papers 2020-18, University of Paris Nanterre, EconomiX.

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    More about this item

    Keywords

    Labor taxation; Public debt; Government spending; Relative prices;
    All these keywords.

    JEL classification:

    • F00 - International Economics - - General - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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