Public Spending Management and Macroeconomic Interdependence
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Summary:
This paper studies, in the context of a New Open Economy Macroeconomics (NOEM) model, the effects of "public competition policies" aimed at improving the efficiency of public spending. Such measures are modeled as an increase in the price elasticity of public consumption. The paper finds that public competition policies significantly affect macroeconomic interdependence across countries. Following a domestic fiscal expansion, an higher public price elasticity increases the substitutability between goods purchased by the domestic and the foreign governments. The same exchange rate variation can therefore sustain larger shifts in relative demand for goods. The expenditure-switching effect is magnified, implying a larger change in relative output. In welfare terms, countries with a larger government sector have an incentive to promote public competition policies.
Series:
Working Paper No. 2004/102
Subject:
Consumption Exchange rates Expenditure External position Foreign assets Foreign exchange National accounts Private consumption
English
Publication Date:
June 1, 2004
ISBN/ISSN:
9781451852646/1018-5941
Stock No:
WPIEA1022004
Pages:
22
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