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FISCAL SHOCKS IN A TWO-SECTOR OPEN ECONOMY WITH ENDOGENOUS MARKUPS

Published online by Cambridge University Press:  11 April 2014

Olivier Cardi  and
Romain Restout
Olivier Cardi*
Affiliation:
University Panthéon-Assas CRED
Romain Restout
Affiliation:
Université de Lorraine BETA and UCL IRES
*
Address correspondence to: Olivier Cardi, Université Panthéon-Assas Paris 2, CRED, 12 Place du Panthéon, 75230 Paris Cedex 05. France; e-mail: olivier.cardi@u-paris2.fr.
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Abstract

We use a two-sector neoclassical open economy model with traded and nontraded goods and endogenous markups to investigate the effects of temporary fiscal shocks. One central finding is that theory can be reconciled with evidence once we allow for endogenous markups and assume that the traded sector is more capital-intensive than the nontraded sector. More precisely, although both ingredients are essential to produce the real exchange rate depreciation, only the second ingredient is necessary to account for the simultaneous decline in investment and the current account, in line with the evidence.

Keywords

Nontraded GoodsFiscal ShocksInvestmentCurrent AccountEndogenous Markup
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 8 , December 2015 , pp. 1839 - 1865
Copyright
Copyright © Cambridge University Press 2014 

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