NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Compositional Effects of Government Spending in a Two-Country Two-SectorProduction Model

Steven N. Durlauf, Robert W. Staiger

NBER Working Paper No. 2543
Issued in March 1988
NBER Program(s):   ITI   IFM

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.

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Document Object Identifier (DOI): 10.3386/w2543

Published: Journal of International Economics 1989. citation courtesy of

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