We assess the role that nontradable goods play as a determinant of fiscal spending multipliers, making use of a two-sector
model. While fiscal multipliers increase with the share of nontradable goods, an inverted U-shaped relationship exists between
multiplier size and the import share. Employing an interacted panel VAR model for EU countries, we estimate the effect of
the share of nontradable goods on fiscal spending multipliers. Our empirical results provide strong evidence for the predictions
of the theoretical model. They imply that the drag of fiscal consolidations is on average smaller in countries with a low
share of nontradable goods.
JEL-Codes:E23, E62, F41, C23
Keywords:Fiscal spending multiplier, Nontradable goods, Openness, DSGE model, Interacted panel VAR model