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Fiscal shocks in a two sector open economy

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  • Olivier Cardi

    ()
    (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Panthéon-Assas - Paris II, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

  • Romain Restout

    ()
    (Université Catholique de Louvain, IRES - UCL)

Abstract

We use a two-sector neoclassical open economy model with traded and non-traded goods to investigate both the aggregate and the sectoral effects of temporary fiscal shocks. One central finding 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 empirical 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 fiscal 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 firm entry modify substantially the response of the real wage and the sectoral composition of GDP in the short-run.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00567855.

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Date of creation: 22 Feb 2011
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Handle: RePEc:hal:wpaper:hal-00567855

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Keywords: Non-traded Goods; Fiscal Shocks; Investment; Current Account.;

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Cited by:
  1. Dimitra Petropoulou & Kwok Tong Soo, 2011. "Product Durability and Trade Volatility," Working Paper Series 2811, Department of Economics, University of Sussex.
  2. Fujisaki, Seiya, 2013. "Taylor rules and equilibrium determinacy in a two-country model with non-traded goods," Economic Modelling, Elsevier, Elsevier, vol. 35(C), pages 597-603.

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