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Fiscal shocks in a two sector open economy with endogenous markups

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  • Olivier Cardi
  • Romain Restout

Abstract

We use a two-sector neoclassical open economy model with traded and non-traded goods and endogenous markups to investigate both the aggregate and the sectoral ef- fects of temporary fiscal shocks. One central finding is that both the sectoral capital intensities and endogenous markups matter in determining the response of key eco- nomic 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. 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 account for the real exchange rate depreciation found in the data. Finally, markup variations triggered by firm entry can raise the real wage, albeit under certain circumstances, and modify substantially the sectoral composition of GDP in the short-run.

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Bibliographic Info

Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2012-17.

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Date of creation: 2012
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Handle: RePEc:ulp:sbbeta:2012-17

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

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References

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  1. Claudia Curi & Cinzia Daraio & Maria Patrick Llerena, 2012. "University Technology Transfer: How (in-)efficient are French universities?," DIS Technical Reports, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza" 2012-02, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
  2. Nir Jaimovich, 2004. "Firm Dynamics, Markup Variations, and the Business Cycle," Discussion Papers, Stanford Institute for Economic Policy Research 07-013, Stanford Institute for Economic Policy Research, revised Mar 2007.
  3. Olivier Cardi & Romain Restout, 2012. "Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy," Working Papers of BETA, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg 2012-01, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  4. Schubert, Stefan F & Turnovsky, Stephen J, 2002. "The Dynamics of Temporary Policies in a Small Open Economy," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 10(4), pages 604-22, November.
  5. Julien Pénin, 2012. "Motivation crowding-out: Is there a risk for science?," Working Papers of BETA, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg 2012-13, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  6. Meixing Dai, 2012. "Static and Dynamic Effects of Central Bank Transparency," Working Papers of BETA, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg 2012-08, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
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Cited by:
  1. Anthony J. Makin, 2013. "The policy (in)effectiveness of government spending in a dependent economy," Journal of Economic Policy Reform, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(3), pages 287-301, September.

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