Fiscal shocks in a two sector open economy

Olivier Cardi (1, 2) , Romain Restout (3)

1 ERMES - Equipe de recherche sur les marches, l'emploi et la simulation
2 X-DEP-ECO - Département d'Économie de l'École Polytechnique
3 UCL IRES - Institut de recherches économiques et sociales

We use a two-sector neoclassical open economy model with traded and non-traded goods to investigate both the aggregate and the sectoral effects of temporary fiscal shocks. One central finding is that both sectoral capital intensities and labor supply elasticity matter in determining the response of key economic variables. In particular, the model can produce a drop in investment and in the current account, in line with empirical evidence, only if the traded sector is more capital intensive than the non-traded sector, and labor is supplied elastically. Irrespective of sectoral capital intensities, a fiscal shock raises the relative size of the non-traded sector substantially in the short-run. Additionally, allowing for the markup to depend on the number of competitors, the two-sector model can produce the real exchange rate depreciation found in the data. Finally, markup variations triggered by firm entry modify substantially the response of the real wage and the sectoral composition of GDP in the short-run.

Mots clés: Non-traded Goods; Fiscal Shocks; Investment; Current Account.; Current Account

Domaines: Economies et finances

Olivier Cardi, Romain Restout. Fiscal shocks in a two sector open economy. 2011. ⟨hal-00567855⟩