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Cyclical effects of the composition of government purchases

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  • AZIZ, Jahangir

    (International Monetary Fund, Washington D.C)

  • LERUTH, Luc

    (International Monetary Fund, Washington D.C)

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    Abstract

    This paper constructs a general equilibrium model with monopolistically competitive firms and endogenous markups where government spending consists of both consumption and investment goods. It is shown that when markups are countercyclical, an increase in the share of investment goods in total public expenditure, raises output, employment,and capital stock in the long-run leading to increases in welfare and productivity. However, this also raises the short run cyclical variability of the economy. In particular, variance of output and employment arising from technological and aggregate demand shocks increase as the long run share of government investment goes up implying a trade-off between greater long-run efficiency and higher short-run volatility. We apply our methodology to the postwar US economy and other OECD countries.

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    Bibliographic Info

    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1999032.

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    Date of creation: 01 Jun 1999
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    Handle: RePEc:cor:louvco:1999032

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    1. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
    2. Evans, Charles L., 1992. "Productivity shocks and real business cycles," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 191-208, April.
    3. Domowitz, Ian & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 55-66, February.
    4. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
    5. Vickrey, William, 1993. "Today's Task for Economists," American Economic Review, American Economic Association, vol. 83(1), pages 1-10, March.
    6. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
    7. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
    8. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
    9. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
    10. Bils, Mark, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 699-718, November.
    11. Roger E.A. Farmer & Jang Ting Guo, 1992. "Real Business Cycles and the Animal Spirits Hypothesis," UCLA Economics Working Papers 680, UCLA Department of Economics.
    12. Julio J. Rotemberg & Michael Woodford, 1990. "Cyclical Markups: Theories and Evidence," NBER Working Papers 3534, National Bureau of Economic Research, Inc.
    13. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
    14. Joaquim Oliveira Martins & Stefano Scarpetta & Dirk Pilat, 1996. "Mark-Up Ratios in Manufacturing Industries: Estimates for 14 OECD Countries," OECD Economics Department Working Papers 162, OECD Publishing.
    15. Susanto Basu, 1994. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," NBER Working Papers 4817, National Bureau of Economic Research, Inc.
    16. Catherine J. Morrison, 1990. "Market Power, Economic Profitability and Productivity Growth Measurement: An Integrated Structural Approach," NBER Working Papers 3355, National Bureau of Economic Research, Inc.
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