Openness and the Sectoral Effects of Fiscal Policy

Abstract

Base on structural VAR evidence for the U.S., we document that a rise in government spending generates three facts: (1) an appreciation of the terms of trade; (2) a fall in the price of traded vs. non-traded goods (proxied by the price of goods relative to services), and (3) a positive co-movement between the manufacturing and the service sector, both in consumption and production. We show that, even if government spending is assumed to be as intensive in goods and services as households' consumption, the relative price behavior can be explained as a simple implication of trade openness. However, a baseline open-economy business-cycle model has problems in rationalizing simultaneously the sectoral co-movement of quantities and the behavior of relative prices. This anomaly is enhanced if government spending is assumed to be intensive in non-traded goods.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 60 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.