Non-Traded Goods and the International Transmission of Fiscal Policy

Abstract

.Abstract. This paper looks at the effect of non-traded goods on the international transmission of fiscal policy. Intertemporal movements in the price of non-traded goods affect real interest rates differentially between countries. The real interest rate effects of a fiscal expansion depend crucially upon both the composition of fiscal spending and the intertemporal elasticity of substitution. With a high intertemporal elasticity of substitution in consumption, a temporary fiscal expansion on non-traded goods will lead consumer real interest rates to move in opposite directions between countries.