The sectoral reallocation of government purchases as budgetary-neutral stabilisation tool : a model-based analysis

Titelangaben

Hohberger, Stefan ; Vogel, Lukas ; Herz, Bernhard:
The sectoral reallocation of government purchases as budgetary-neutral stabilisation tool : a model-based analysis.
In: International Economics and Economic Policy. Bd. 12 (2015) Heft 1 . - S. 59-74.
ISSN 1612-4812
DOI: https://doi.org/10.1007/s10368-014-0280-0

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Abstract

The paper uses a two-sector DSGE model with nominal and real rigidities to analyse the stabilising properties of fiscal policy rules in a small open economy in monetary union. The focus is on the potential of budgetary-neutral rules that adjust the composition of government purchases between tradable and non-tradable goods in response to business cycle indicators as a stabilisation tool when fiscal limits are tight. The paper finds that the state-dependent reallocation of government purchases between tradable and non-tradable goods stabilises domestic activity and reduces the welfare costs of economy-wide and sector-specific shocks. Potential welfare gains from such policy rules are higher than welfare gains from standard counter-cyclical fiscal policy rules that adjust the overall level of government purchases. Contrary to standard deficit spending policies, the state-dependent expenditure composition rules avoid the trade- off between, first, counter-cyclical spending and, second, consolidation needs in economic downturns in the presence of explicit or implicit deficit and debt limits.