Open Economies Review

, Volume 21, Issue 3, pp 335–350

Fiscal Shocks and The Sectoral Composition of Output

Research Article

Abstract

We study the impact of shocks to different types of government spending on the sectoral composition of output for a panel of EMU member countries. We find that fiscal shocks lead to an increase in the relative size of the nontraded sector, with the impact varying across the different spending categories. There is typically no significant impact on the level of production in the tradables sector but the level of imports increases and the level of exports declines in most cases. Overall, the results show that fiscal shocks matter not only for aggregate variables but also for the sectoral composition of output. The sectoral output results are consistent with previous work concerning the impact of fiscal shocks on the real exchange rate and the relative price of nontradables.

Keywords

Government spending shocks Tradables Nontradables European Monetary Union Panel VAR 

JEL Classification

E24 E62 

References

  1. Arellano M (2003) Panel data Econometrics. Oxford University Press, OxfordCrossRefGoogle Scholar
  2. Beetsma R, Giuliodori M, Klaassen F (2006) Trade spill-overs of fiscal policy in the European Union: a panel analysis. Econ Policy 21(48):639–687CrossRefGoogle Scholar
  3. Beetsma R, Giuliodori M, Klaassen F (2008) The effects of public spending shocks on trade balances and budget deficits in European Union. Journal of the European Economic Association 6(2–3):414–423CrossRefGoogle Scholar
  4. Beetsma R, Giuliodori M, Klaassen F (2009) Temporal aggregation and SVAR identification, with an application to fiscal policy. Econ Lett 105:253–255CrossRefGoogle Scholar
  5. Bénétrix AS (2009) Fiscal shocks and real wages. IIIS Discussion Paper No. 288Google Scholar
  6. Bénétrix AS, Lane PR (2009) Fiscal shocks and the real exchange rate. IIIS Discussion Paper No. 286Google Scholar
  7. Blanchard O (2007) Current account deficits in rich countries. NBER Working Paper No. 12925Google Scholar
  8. Blanchard O, Perotti R (2002) An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Q J Econ 117(4):1329–1368CrossRefGoogle Scholar
  9. Burnside C, Eichenbaum M, Fisher JDM (2004) Fiscal shocks and their consequences. J Econ Theory 115(1):89–117CrossRefGoogle Scholar
  10. Canova F, Pappa E (2007) Price differentials in monetary unions: the role of fiscal shocks. Econ J 117:713–737CrossRefGoogle Scholar
  11. Canzoneri MB, Cumby RE, Diba B (1999) Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries. J Int Econ 47(2):245–266CrossRefGoogle Scholar
  12. Cavallo M (2005) Government employment expenditure and the effects of fiscal policy shocks. Federal Reserve Bank of San FranciscoGoogle Scholar
  13. Cavallo M (2007) Goverment consumption expenditure and the current account. Public Financ Manag 7:73–115Google Scholar
  14. Edelberg W, Eichenbaum M, Fisher JDM (1999) Understanding the effects of a shock to government purchases. Rev Econ Dyn 2(1):166–206CrossRefGoogle Scholar
  15. Engler P, Fidora M, Thimann C (2007) External imbalances and the US current account: how supply-side changes affect an exchange rate adjustment. ECB Working Paper No. 761Google Scholar
  16. Galstyan V, Lane PR (2009) The composition of government spending and the real exchange rate. J Money Credit Bank 41:1233–1249CrossRefGoogle Scholar
  17. Giordano R, Momigliano S, Neri S, Perotti R (2007) The effects of fiscal policy in Italy: evidence from a VAR model. European Journal of Political Economy 23(3):707–733CrossRefGoogle Scholar
  18. Lane PR, Perotti R (2003) The importance of composition of fiscal policy: evidence from different exchange rate regimes. J Public Econ 87(9–10):2253–2279CrossRefGoogle Scholar
  19. Matsuyama K (1992) A simple model of sectoral adjustment. Rev Econ Stud 59:375–388CrossRefGoogle Scholar
  20. Monacelli T, Perotti R (2008) Openness and the sectoral effects of fiscal policy. Journal of the European Economic Association 6(2–3):395–403CrossRefGoogle Scholar
  21. Monacelli T, Perotti R (2009) Fiscal policy, the real exchange rate, and traded goods. Econ J (in press)Google Scholar
  22. Mountford A, Uhlig H (2008) What are the effects of fiscal policy shocks? NBER Working Paper No. 14551Google Scholar
  23. Nickell SJ (1981) Biases in dynamic models with fixed effects. Econometrica 49(6):1417–1426CrossRefGoogle Scholar
  24. Obstfeld M (2009) Time of troubles: the yen and Japan’s economy, 1985-2008. mimeo, University of California, BerkeleyGoogle Scholar
  25. Obstfeld M, Rogoff K (1996) Foundations of international macroeconomics. MIT, CambridgeGoogle Scholar
  26. Obstfeld M, Rogoff K (2001) Perspectives on OECD capital market integration: implications for U.S. current account adjustment. In: Federal reserve bank of Kansas City global economic integration: opportunities and challenges, pp. 169-208Google Scholar
  27. Obstfeld M, Rogoff K (2005) Global current account imbalances and exchange rate adjustments. In: Brainard W, Perry G (eds) Brookings papers on economic activity vol 1, pp 67–146Google Scholar
  28. Obstfeld M, Rogoff K (2007) The unsustainable US current account position revisited. In: Clarida R (ed) G7 current account imbalances: sustainability and adjustment. University of Chicago Press, ChicagoGoogle Scholar
  29. Pappa E (2005) New-Keynesian or RBC transmission? the effects of fiscal policy in labor markets. CEPR Discussion Paper No. 5313Google Scholar
  30. Perotti R (2004) Estimating the effects of fiscal policy in OECD countries. mimeo, Università BocconiGoogle Scholar
  31. Perotti R (2007) Public investment and the Golden Rule: another (different) look. mimeo, Università BocconiGoogle Scholar
  32. Ramey VA (2008) Identifying government spending shocks: it’s all in the timing. mimeo, UCSD Institute for Applied EconomicsGoogle Scholar
  33. Ramey VA, Shapiro MD (1998) Costly capital reallocation and the effects of government spending. Carnegie-Rochester Conf Ser Public Policy 48:145–194CrossRefGoogle Scholar
  34. Ravn M, Schmitt-Grohe S, Uribe M (2007) Explaining the effects of government spending shocks on consumption and real exchange rate. NBER Working Paper No. 13328Google Scholar
  35. Romer C, Romer D (2009) The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks. Am Econ Rev (in press)Google Scholar
  36. Tagkalakis A (2006) The effects of macroeconomic policy shocks on the UK labour market. Int J Financ Econ 11(3):229–244CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Department of Economics and IIISTrinity College DublinDublinIreland
  2. 2.CEPRLondonUK

Personalised recommendations