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Public Debt and Relative Prices in a Cross-Section of Countries

Author

Listed:
  • Vahagn Galstyan

    () (Department of Economics, Trinity College Dublin)

  • Adnan Velic

    () (Dublin Institute of Technology)

Abstract

This paper examines the effects of debt and distortionary labor taxation on the long-run behavior of the relative price of nontraded goods. At the theoretical level, in a two-sector open economy model we demonstrate that higher public debt, associated with higher taxation, contracts labor supply in both traded and nontraded goods sectors. Relative prices move inversely with relative supply shifts which, in turn, depend on relative factor intensities. At the empirical level, for a panel of advanced economies, we find statistically significant effects of public debt and taxes on the relative price of nontraded goods, with higher debt and taxes associated with higher relative prices.

Suggested Citation

  • Vahagn Galstyan & Adnan Velic, 2016. "Public Debt and Relative Prices in a Cross-Section of Countries," Trinity Economics Papers tep0816, Trinity College Dublin, Department of Economics, revised Jul 2016.
  • Handle: RePEc:tcd:tcduee:tep0816
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    References listed on IDEAS

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    1. repec:eso:journl:v:48:y:2017:i:3:p:231-251 is not listed on IDEAS
    2. Galstyan, Vahagn & Velic, Adnan, 2017. "Debt thresholds and real exchange rates: An emerging markets perspective," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 452-470.
    3. Vahagn Galstyan & Adnan Velic, 2017. "Taxation, Debt and Relative Prices in the Long Run: The Irish Experience," The Economic and Social Review, Economic and Social Studies, vol. 48(3), pages 231-251.

    More about this item

    Keywords

    labor taxation; public debt; government spending; relative prices;

    JEL classification:

    • F00 - International Economics - - General - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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