Productive Public Spending in a Balassa-Samuelson Model of Dual Inflation

Dual inflation takes place when prices increases in non-tradable goods are higher than those of tradable goods. In this paper, we develop a model where public spending has a positive externality on the production of those sectors. The main results suggested by the paper are the following: 1)An increase in non-productive public spending does not generate dual inflation, as the usual Balassa-Samuelson result states and 2) An increase in productive public spending raises the productivity of those sectors and this can result in dual inflation, dual deflation or no effect on prices. Dual inflation only takes place when public spending has a bigger effect on the production technology of the tradable sector than on the non-tradable one.