Buy National and the Business Cycle

By concentrating the 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 due to 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 of 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.