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The sectoral reallocation of government purchases as budgetary-neutral stabilisation tool: a model-based analysis

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  • Stefan Hohberger

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  • Lukas Vogel
  • Bernhard Herz

Abstract

The paper uses a two-sector DSGE model with nominal and real rigidities to analyse the stabilising properties of fiscal policy rules in a small open economy in monetary union. The focus is on the potential of budgetary-neutral rules that adjust the composition of government purchases between tradable and non-tradable goods in response to business cycle indicators as a stabilisation tool when fiscal limits are tight. The paper finds that the state-dependent reallocation of government purchases between tradable and non-tradable goods stabilises domestic activity and reduces the welfare costs of economy-wide and sector-specific shocks. Potential welfare gains from such policy rules are higher than welfare gains from standard counter-cyclical fiscal policy rules that adjust the overall level of government purchases. Contrary to standard deficit spending policies, the state-dependent expenditure composition rules avoid the trade-off between, first, counter-cyclical spending and, second, consolidation needs in economic downturns in the presence of explicit or implicit deficit and debt limits. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Stefan Hohberger & Lukas Vogel & Bernhard Herz, 2015. "The sectoral reallocation of government purchases as budgetary-neutral stabilisation tool: a model-based analysis," International Economics and Economic Policy, Springer, vol. 12(1), pages 59-74, March.
  • Handle: RePEc:kap:iecepo:v:12:y:2015:i:1:p:59-74
    DOI: 10.1007/s10368-014-0280-0
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal policy; Stabilisation; Welfare; Tradables; Non-tradables; Small open economy; Monetary union; E37; E62; F41;

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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