Advertisement

Government Consumption

  • Burkhard Heer
Chapter
Part of the Springer Texts in Business and Economics book series (STBE)

Abstract

Empirically, government expenditures represent a large share of total demand and significantly affect output, employment, and welfare. In the introductory Sect. 4.2 of this chapter, we document some selected empirical facts of government consumption. In particular, we find that government consumption is procyclical, and after an unexpected increase in consumption, output, employment, and (to a smaller extent) private consumption all increase.

References

  1. Abel, A. B. (1990). Asset pricing under habit formation and catching-up-with-the-Joneses. American Economic Review, 80, 38–42.Google Scholar
  2. Aiyagari, R. S., Christiano, L. J., & Eichenbaum, M. (1994). The output, employment, and interest effect of government consumption. Journal of Monetary Economics, 30, 73–86.CrossRefGoogle Scholar
  3. Altonij, J. G. (1986). Intertemporal substitution in labor supply: Evidence from micro data. Journal of Political Economy, 94, S176–S215.CrossRefGoogle Scholar
  4. Ambler, S., & Paquet, A. (1996). Fiscal spending shocks, endogenous government spending, and real business cycles. Journal of Economic Dynamics and Control, 20, 237–256.CrossRefGoogle Scholar
  5. Aschauer, D. A. (1985). Fiscal policy and aggregate demand. American Economic Review, 75, 117–121.Google Scholar
  6. Auerbach, A. J., & Gorodnichenko, Y. (2011). Fiscal multipliers in recession and expansion. NBER working paper, 17447.Google Scholar
  7. Barro, R. J. (1981). Output effects of government purchases. The Journal of Political Economy, 89(6), 1086–1121.CrossRefGoogle Scholar
  8. Barro, R. J., & Sala-i-Martin, X. (2003). Economic growth (2nd ed.). Cambridge, MA: MIT Press.Google Scholar
  9. Basu, S., Fernald, J. G., & Kimball, M. S. (2006). Are technology improvements contractionary?. American Economic Review, 96, 1418–1448.CrossRefGoogle Scholar
  10. Baxter, M., & King, R. G. (1993). Fiscal policy in general equilibrium. American Economic Review, 91, 167–185.Google Scholar
  11. Blanchard, O. J., & Perotti, R. (2002). An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Quarterly Journal of Economics, 177, 1329–1368.CrossRefGoogle Scholar
  12. Brandner, P., & Neusser, K. (1992). Business cycles in open economies: Stylized facts for Austria and Germany. Review of World Economics, 128(1), 67–87.CrossRefGoogle Scholar
  13. Brinca, P., Holter, H. A., Krusell, P., & Malafry, L. (2016). Fiscal multipliers in the 21st century. Journal of Monetary Economics, 77, 53–69.CrossRefGoogle Scholar
  14. Bullard, J., & Mitra, K. (2002). Learning about monetary policy rules. Journal of Monetary Economics, 49(6), 1105–1129.CrossRefGoogle Scholar
  15. Calvo, G. A. (1983). Staggered prices in a utility-maximizing framework. Journal of Monetary Economics, 12, 383–398.CrossRefGoogle Scholar
  16. Christiano, L. J., & Eichenbaum, M. (1992). Current Real-Business-Cycle theories and aggregate labor market fluctuations. American Economic Review, 82(3), 430–450.Google Scholar
  17. Christiano, L. J., Eichenbaum, M., & Evans, C. L. (1997). Sticky prices and limited participation models of money: A comparison. European Economic Review, 41, 1201–1249.CrossRefGoogle Scholar
  18. Christiano, L. J., Eichenbaum, M., & Evans, C. L. (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of political Economy, 113(1), 1–45.CrossRefGoogle Scholar
  19. Clarida, R., Gali, J., & Gertler, M. (2000). Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics, 115(1), 147–180.CrossRefGoogle Scholar
  20. Constandinides, G. M. (1990). Habit formation: A resolution of the equity premium. Journal of Political Economy, 98, 519–543.CrossRefGoogle Scholar
  21. Cooley, T. F., & Prescott, E. C. (1995). Economic growth and business cycles. In T. F. Cooley (Ed.), Frontiers of business cycle research (pp. 1–64). Princeton: Princeton University Press.Google Scholar
  22. Davis, S. J., & Kahn, J. A. (2008). Interpreting the Great Moderation: Changes in the volatility of economic activity at the macro and micro levels. Journal of Economic Perspectives, 22(4), 155–180.CrossRefGoogle Scholar
  23. Devereux, M. B., Head, A. C., & Lapham, B. J. (1996). Monopolistic competition, increasing returns, and the effects of government spending. Journal of Money, Credit, and Banking, 28(2), 233–254.CrossRefGoogle Scholar
  24. Dixit, A., & Stiglitz, J. (1977). Monoplistic competition and optimum product diversity. American Economic Review, 67(3), 297–308.Google Scholar
  25. Domeij, D., & Floden, M. (2006). The labor supply elasticity and borrowing constraints: Why estimates are biased. Review of Economic Dynamics, 9, 242–262.CrossRefGoogle Scholar
  26. Dotsey, M., & Ireland, P. (1996). The welfare cost of inflation in general equilibrium. Journal of Monetary Economics, 37, 29–47.CrossRefGoogle Scholar
  27. Dynan, K. E., Elmendorf, D. W., & Sichel, D. (2006). Can financial innovation help to explain the reduced volatility of economic activity? Journal of Monetary Economics, 53(1), 123–150.CrossRefGoogle Scholar
  28. Erceg, C. J., Henderson, D. W., & Levin, A. T. (2000). Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics, 46(2), 281–313.CrossRefGoogle Scholar
  29. Erceg, C. J., & Linde, J. (2012). Fiscal consolidation in an open economy. American Economic Review, 102(3), 186–191.CrossRefGoogle Scholar
  30. Farhi, E., & Werning, I. (2016). Fiscal multipliers: Liquidity traps and currency unions. In J. B. Taylor & H. Uhlig (Eds.), Handbook of the macroeconomics (pp. 2418–2492). Amsterdam: Elsevier.Google Scholar
  31. Fatás, A., & Mihov, I. (2001). The effects of fiscal policy on consumption and employment: Theory and evidence. CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.Google Scholar
  32. Fehr, H., Kallweit, M., & Kindermann, F. (2013). Should pensions be progressive? European Economic Review, 63, 94–116.CrossRefGoogle Scholar
  33. Féve, P., Matherod, J., & J.-G. Sahuc (2012). A pitfall with DSGE-based, estimated government spending multipliers. IDIE Working Paper, 708.Google Scholar
  34. Fisher, J. D. M., & Peters, R. (2010). Using stock returns to identify government spending shocks. Economic Journal, 120(544), 414–436.CrossRefGoogle Scholar
  35. Galí, J. (1999). Technology, employment, and the business cycle: Do technology shocks explain aggregate fluctuations? American Economic Review, 89, 249–271.CrossRefGoogle Scholar
  36. Galí, J., & Lopez-Salido, J. D. (2007). Understanding the effects of government spending on consumption. Journal of the European Economic Association, 5(1), 227–270.CrossRefGoogle Scholar
  37. Hanushek, E. A., & Woessmann, L. (2011). The economics of international differences in educational achievement. In E. A. Hanushek, S. Machin, & L. Woessmann (Eds.), Handbook of the Economics of Education (Vol. 3, pp. 89–200). Amsterdam: Elsevier.Google Scholar
  38. Heer, B., & Maußner, A. (2009). Dynamic general equilibrium modeling: Computational methods and applications (2nd ed.). Heidelberg: Springer.CrossRefGoogle Scholar
  39. Heer, B., Maußner, A., & McNelis, P. (2011). The money-age distribution: Empirical facts and the limits of three monetary models. Journal of Macroeconomics, 33, 390–405.CrossRefGoogle Scholar
  40. Heer, B., Maußner, A., & Ruf, H. (2017). Q-Targeting in New Keynesian models. Journal of Business Cycle Research, 13, 189–224.CrossRefGoogle Scholar
  41. Heer, B., Rohrbacher, S., & Scharrer, C. (2017). Aging, the Great Moderation and business-cycle volatility in a life-cycle model. Macroeconomic Dynamics, 21, 362–383.CrossRefGoogle Scholar
  42. Heer, B., & Scharrer, C. (2018). The age-specific burdens of short-run fluctuations in government spending. Journal of Economic Dynamics and Control, 90, 45–75.CrossRefGoogle Scholar
  43. Hindriks, J., & Myles, G. D. (2006). Intermediate public economics. Cambridge, MA: MIT Press.Google Scholar
  44. Jaimovich, N., & Siu, H. E. (2009). The young, the old, and the restless: Demographics and business cycle volatility. American Economic Review, 99, 804–826.CrossRefGoogle Scholar
  45. Jermann, U. J. (1998). Asset pricing in production economies. Journal of Monetary Economics, 41, 257–275.CrossRefGoogle Scholar
  46. Killingsworth, M. R. (1983). Labor supply. Cambridge, MA: Cambridge University Press.CrossRefGoogle Scholar
  47. Kwan, Y. K. (2006). The direct substitutability between government and private consumption in East Asia. NBER working paper, 12431.Google Scholar
  48. Linnemann, L., & Schabert, A. (2003). Fiscal policy in the New Neoclassical synthesis. Journal of Money, Credit and Banking, 35(6), 911–929.CrossRefGoogle Scholar
  49. Lucas, R. E. (1976). Econometric policy evaluation: A critique. Carnegie-Rochester Series on Public Policy, 1, 19–46.CrossRefGoogle Scholar
  50. Lugauer, S. (2012). Estimating the effect of the age distribution on cyclical output volatility across the United States. The Review of Economics and Statistics, 94(4), 896–902.CrossRefGoogle Scholar
  51. Lugauer, S., & Redmond, M. (2012). The age distribution and business cycle volatility: International evidence. Economics Letters, 117(3), 694–696.CrossRefGoogle Scholar
  52. MaCurdy, T. E. (1981). An empirical model of labor supply in a life-cycle setting. Journal of Political Economy, 89, 1059–1085.CrossRefGoogle Scholar
  53. Maußner, A. (2000). The analytics of New Keynesian Phillips curves. Discussion Paper Series Institute of Economics, University of Augsburg, 313.Google Scholar
  54. Monacelli, T., & Perotti, R. (2008). Fiscal policy, wealth effects, and markups. NBER working paper, 14584.Google Scholar
  55. Monacelli, T., Perotti, R., & Trigari, A. (2010). Unemployment fiscal multipliers. Journal of Monetary Economics, 57, 531–553.CrossRefGoogle Scholar
  56. Murphy, D., & Walsh, K. J. (2016). Spending shocks and interest rates. Working Paper.Google Scholar
  57. Nekarda, C., & Ramey, V. A. (2013). The cyclical behavior of the price-cost markup. Working paper, mimeo.Google Scholar
  58. Ni, S. (1995). An empirical analysis on the substitutability between private consumption and government purchases. Journal of Monetary Economics, 36, 593–605.CrossRefGoogle Scholar
  59. Ramey, V. A. (2011). Identifying government spending shocks: It’s all in the timing. The Quarterly Journal of Economics, 126, 1–50.CrossRefGoogle Scholar
  60. Ramey, V. A., & Shapiro, M. D. (1998). Costly capital reallocation and the effects of government spending. Carnegie-Rochester Conference Series on Public Policy, 48(1), 145–194.CrossRefGoogle Scholar
  61. Ravn, M. O., Schmitt-Grohé, S., & Uribe, M. (2012). Consumption, government spending, and the real exchange rate. Journal of Monetary Economics, 59, 215–234.CrossRefGoogle Scholar
  62. Rotemberg, J. J., & Woodford, M. (1992). Oligopolistic pricing and the effects of aggregate demand on economic activity. Journal of Political Economy, 100, 1153–1207.CrossRefGoogle Scholar
  63. Schmitt-Grohé, S., & Uribe, M. (2007). Optimal simple and implementable monetary and fiscal rules. Journal of Monetary Economics, 54, 1702–1725.CrossRefGoogle Scholar
  64. Stock, J. H., & Watson, M. W. (2003). Has the business cycle changed and why? In M. Gertler & K. Rogoff (Eds.), National Bureau of Economic Research macroeconomics annual 2002 (pp. 159–230). Cambridge, MA: MIT Press.Google Scholar
  65. Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, 33, 195–214.CrossRefGoogle Scholar
  66. Trabandt, M., & Uhlig, H. (2011). The Laffer curve revisited. Journal of Monetary Economics, 58, 305–327.CrossRefGoogle Scholar
  67. Uhlig, H. (2007). Explaining asset prices with external habits and wage rigidities in a DSGE model. American Economic Review: Papers and Proceedings, 97, 239–243.CrossRefGoogle Scholar
  68. von Weizsäcker, C. C. (1971). Notes on endogenous change of tastes. Journal of Economic Theory, 3, 345–372.CrossRefGoogle Scholar
  69. Walsh, C. E. (2005). Labor market search, sticky prices, and interest rate policy. Review of Economic Dynamics, 8, 829–849.CrossRefGoogle Scholar
  70. Walsh, C. E. (2010). Monetary theory and policy. Cambridge, MA: MIT Press.Google Scholar

Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  • Burkhard Heer
    • 1
  1. 1.Department of Business and EconomicsUniversity of AugsburgAugsburgGermany

Personalised recommendations