Non-tradable Goods and Fiscal Multipliers

This research project aims at studying the role of the production structure at the macroeconomic level as a determinant of the size of fiscal spending multipliers. Since the composition of production of an economy matters for a country's degree of openness – and in particular for its export potential – it is also likely to play a role for the size of fiscal spending multipliers. To this purpose, we provide a theoretical setting to study the interaction between production structure and fiscal responses and develop an empirical strategy to test the predictions of the model. In particular, for our empirical application we decompose aggregate production of all 28 EU countries into tradable and non-tradable goods and services and utilise interacted panel vector autoregressive (IPVAR) models to assess the implications of different sizes of the share of non-tradable goods for fiscal spending multipliers. The proposed setting allows for a high degree of flexibility regarding the timing of the effects, and appropriately accounts for the interdependencies of economic business cycles in the context of discretionary changes in fiscal spending.