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Fiscal shocks in a two sector open economy with endogenous markups

Author

Listed:
  • Olivier Cardi
  • Romain Restout
Abstract
We use a two-sector neoclassical open economy model with traded and non-traded goods and endogenous markups to investigate both the aggregate and the sectoral ef- fects of temporary fiscal shocks. One central finding is that both the sectoral capital intensities and endogenous markups matter in determining the response of key eco- nomic 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. 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 account for the real exchange rate depreciation found in the data. Finally, markup variations triggered by firm entry can raise the real wage, albeit under certain circumstances, and modify substantially the sectoral composition of GDP in the short-run.

Suggested Citation

  • Olivier Cardi & Romain Restout, 2012. "Fiscal shocks in a two sector open economy with endogenous markups," Working Papers of BETA 2012-17, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2012-17
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    File URL: http://beta.u-strasbg.fr/WP/2012/2012-17.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Cardi, Olivier & Restout, Romain & Claeys, Peter, 2020. "Imperfect mobility of labor across sectors and fiscal transmission," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    2. Anthony J. Makin, 2013. "The policy (in)effectiveness of government spending in a dependent economy," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 16(3), pages 287-301, September.
    3. Francois, John Nana & Ahmad, Nazneen & Keinsley, Andrew & Nti-Addae, Akwasi, 2022. "Heterogeneity in the long-run remittance-output relationship: Theory and new evidence," Economic Modelling, Elsevier, vol. 110(C).

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    More about this item

    Keywords

    Non-traded Goods; Fiscal Shocks; Investment; Current Account.;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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