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BUY NATIONAL AND THE BUSINESS CYCLE

Published online by Cambridge University Press:  29 June 2015

Mario Larch*
Affiliation:
University of Bayreuth, ifo Institute, CESifo and GEP
Wolfgang Lechthaler
Affiliation:
Kiel Institute for the World Economy
*
Address correspondence to: Mario Larch, University of Bayreuth, ifo Institute, CESifo, and GEP, Universitaetsstrasse 30, 95447 Bayreuth, Germany; e-mail: mario.larch@uni-bayreuth.de.

Abstract

By concentrating a stimulus on the domestic economy, Buy National clauses are argued to lead to higher fiscal multipliers. We show that this argument falls short. Although it is true that domestic demand for domestic goods is increased, at the same time foreign demand for domestic goods is reduced by adverse changes in the real exchange rate. The two effects are of similar magnitude, so that Buy National clauses do not lead to a stronger stimulus to GDP. Apart from that, restricting the stimulus to domestic products makes the stimulus more expensive, because cheap foreign products are ignored. Consequently, real public consumption is lowered by Buy National clauses.

Type
Articles
Copyright
Copyright © Cambridge University Press 2015 

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