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

   (725 K)

   (219 K)

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.

Published: Journal of International Economics 1989.

This paper is available as PDF (725 K) or DjVu (219 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX