Working Paper: NBER ID: w2543
Authors: Steven N. Durlauf; Robert W. Staiger
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.
Keywords: government spending; relative prices; interest rates; current account; Heckscher-Ohlin model
JEL Codes: H50; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government spending composition towards nontradeables (H59) | Appreciation of the real exchange rate (F31) |
| Government spending composition towards nontradeables (H59) | Decrease in world interest rates (E43) |
| Government spending composition towards nontradeables (H59) | Increase in world interest rates (E43) |
| Anticipated shift towards nontradeables (F29) | Current account deficit (F32) |
| Anticipated shift towards nontradeables (F29) | Current account surplus (F32) |