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

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Steven N. Durlauf
Robert W. Staiger

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2543.

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Date of creation: Mar 1988
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Handle: RePEc:nbr:nberwo:2543

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Helpman, Elhanan, 1976. "Macroeconomic Policy in a Model of International Trade with a Wage Restriction," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(2), pages 262-77, June. [Downloadable!] (restricted)
  2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec.. [Downloadable!] (restricted)
  3. Jones, Ronald W, 1985. "Income Effects and Paradoxes in the Theory of International Trade," Economic Journal, Royal Economic Society, vol. 95(378), pages 330-44, June. [Downloadable!] (restricted)
  4. Barry, Frank G., 1987. "Fiscal policy in a small open economy An integration of the short-run, Heckscher-Ohlin and capital accumulation models," Journal of International Economics, Elsevier, vol. 22(1-2), pages 103-121, February. [Downloadable!] (restricted)
  5. B. Douglas Bernheim, 1987. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 263-316 National Bureau of Economic Research, Inc. [Downloadable!]
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  6. Razin, Assaf, 1984. "Capital movements, intersectoral resource shifts and the trade balance," European Economic Review, Elsevier, vol. 26(1-2), pages 135-152. [Downloadable!] (restricted)
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  1. Sajid Anwar, 1993. "International transmission of government spending on industries," Open Economies Review, Springer, vol. 4(3), pages 287-301, September. [Downloadable!] (restricted)
  2. Sajid Anwar, 1997. "International Transmission Of Government Spending, Monopolistic Competition And North-South Trade," International Economic Journal, Korean International Economic Association, vol. 11(4), pages 113-126, December. [Downloadable!] (restricted)
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