Fiscal Policy, Relative Prices, and Net Exports in a Currency Union
American Economic Journal: Macroeconomics
vol. 15,
no. 1, January 2023
(pp. 371-410)
Abstract
The hoped-for silver lining of euro-area austerity programs was to raise external competitiveness and improve current accounts. Using product- and industry-level data for 12 countries over the period 1999–2018, we show that reductions in government spending reduce prices and wages but only for products with low import content and industries with low export shares. This leads to asymmetric expenditure switching, with net exports improving through lower imports rather than higher exports. The standard small-open-economy model fails to rationalize these findings, but home bias in government spending and frictions preventing factor prices from equalizing across sectors considerably improve the fit of the model.Citation
Lambertini, Luisa, and Christian Proebsting. 2023. "Fiscal Policy, Relative Prices, and Net Exports in a Currency Union." American Economic Journal: Macroeconomics, 15 (1): 371-410. DOI: 10.1257/mac.20200470Additional Materials
JEL Classification
- E31 Price Level; Inflation; Deflation
- E62 Fiscal Policy
- F14 Empirical Studies of Trade
- F33 International Monetary Arrangements and Institutions
- F45 Macroeconomic Issues of Monetary Unions
- H20 Taxation, Subsidies, and Revenue: General
- H50 National Government Expenditures and Related Policies: General
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