Productive Government Expenditure in Monetary Business Cycle Models

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper assesses the transmission of fiscal policy shocks in a New Keynesian framework where government expenditures contribute to aggregate production. It is shown that even if the impact of government expenditures on production is small, this assumption helps to reconcile the models' predictions about fiscal policy effects with recent empirical evidence. In particular, it is shown that government expenditures can cause a rise in private consumption, real wages, and employment if the government share is not too large and public finance does not solely rely on distortionary taxation. When government expenditures are partially financed by public debt, unit labor costs fall in response to a fiscal expansion, such that inflation tends to decline. Households are willing to raise consumption if monetary policy is active, i.e. ensures that the real interest rate rises with inflation. Otherwise, private consumption can also be crowded-out, as in the conventional case where government expenditures are not productive. The interaction between monetary and fiscal policy is thus decisive for the short-run macroeconomic effects of government expenditure shocks. Terms of use: Documents inJEL classification: E62, E21, E32.

A Comprehensive Analysis of the Response of Private Consumption to Government Spending

“…It turns out at once that if the Frisch elasticity of labor supply is in the vicinity of the value one, as suggested by Kimball and Shapiro [19], the production elasticity of government spending must be higher than 0.4 ( 0.4 α > ) in order to satisfy the condition, 0 α αφ φ + − > . Contrary to the results of Linnemann and Schabert [11], it is Tervala's [13] sum and substance that the positive response of private consumption to government spending cannot occur solely in the presence of productivity, as long as government spending is mildly productive ( 0 0.4 α…”

“…By using a simple model, Tervala [13] exclusively studied lump-sum taxes and documented that productive government expenditures are unlikely to cause a positive consumption response when the production elasticity of government spending is small, as empirically observed in previous works. This conclusion is different from Linnemann and Schabert [11], who show that even when the production elasticity of government spending is minimal; it contributes towards generating a positive private consumption response.…”

“…According to this viewpoint, government spending enhances the productivity of private firms and increases output by varying degrees, as shown in the large body of literature spearheaded by Aschauer [10]. In the present context, Linnemann and Schabert [11] examined the effects of productive government spending on some key variables in a New Keynesian framework, and they noted that private consumption can positively respond to productive government spending.…”

“…We consider a model economy in which the foregoing dual aspects of govern- In the literature, Linnemann and Schabert [11] and Tervala [13] assume that government spending contributes to private production, as in Barro [9]. Based on this, it is assumed that the representative firm produces a single final good according to the available technology:…”

Disaggregated approach to government spending shocks: a theoretical analysis

“…Some of the recent studies exploit government spending through the concept of effective consumption, which is a constant elasticity of substitution (CES) aggregate of private consumption and government spending. Linnemann and Schabert (2006) and Bouakez and Rebei (2007) are examples of this kind. This work has similar a set up to these studies in the sense that household preferences depend on government spending in association with private consumption.…”