Fiscal Shocks In A Two Sector Open Economy

The authors 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 ?s-cal shock raises the relative size of the non-traded sector substantially in the short-run.

Provided by: Centre pour la Communication Scientifique Directe Topic: CXO Date Added: Feb 2011 Format: PDF

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