Based on structural VAR evidence for the U.S., we document that a rise in government spending generates three facts: (1) an appreciation of the terms of trade; (2) a fall in the price of traded vs. non-traded goods (proxied by the price of goods relative to services), and (3) a positive co-movement between the manufacturing and the service sector, both in consumption and production. We show that, even if government spending is assumed to be as intensive in goods and services as households' consumption, the relative price behavior can be explained as a simple implication of trade openness. However, a baseline open-economy business-cycle model has problems in rationalizing simultaneously the sectoral co-movement of quantities and the behavior of relative prices. This anomaly is enhanced if government spending is assumed to be intensive in non-traded goods. (JEL: E52, F41, E62) (c) 2008 by the European Economic Association.
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Volume (Year): 6 (2008) Issue (Month): 2-3 (04-05) Pages: 395-403 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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