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Fiscal Spending Shocks, Endogenous Government Spending and Real Business Cycles

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Abstract

We consider the effects of fiscal spending shocks in a real business model when a portion of government spending is endogenized and chosen to maximize the utility of the representative private agent. Endogenous spending partially neutralizes the effects of both exogenous fiscal spending shocks and technology shocks. When we calibrate the standard deviation of exogenous fiscal spending shocks in order to reproduce the observed volatility of total fiscal spending, the model predicts a correlation between total hours and labor productivity that is significantly closer to U.S. data than standard real business cycle models. Ce texte analyse les effets de chocs de dépenses fiscales dans un modèle du cycle d'origine réel où les dépenses gouvernementales sont en partie endogènes. Celles-ci sont choisies par le gouvernement pour maximiser la fonction d'utilité d'un agent privé représentatif. Nous montrons que les dépenses publiques endogènes neutralisent partiellement les effets combinés des chocs technologiques et des chocs fiscaux exogènes. Quand nous étalonnons l'écart-type des chocs et des dépenses publiques exogènes pour reproduire la volatilité observée des dépenses gouvernementales totales, le modèle prédit une corrélation entre les heures totales travaillées et la productivité moyenne du travail qui se rapproche significativement plus de la valeur observée dans les données américaines que ce n'est le cas pour les modèles standards du cycle d'origine réel.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 14.

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Length: 30 pages
Date of creation: May 1993
Date of revision:
Publication status: Published, Journal of Economic Dynamics and Control, 20(1), pages 237-256, 1996
Handle: RePEc:cre:crefwp:14

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Keywords: real business cycles; labor productivity; endogenous fiscal policy;

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References

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  1. Cho, Jang-Ok & Cooley, Thomas F., 1994. "Employment and hours over the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 18(2), pages 411-432, March.
  2. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
  3. Steve Ambler & Alain Paquet, 1994. "Recursive Methods for Computing Equilibria of General Equilibrium Dynamic Stackelberg Games," Cahiers de recherche CREFE / CREFE Working Papers 25, CREFE, Université du Québec à Montréal.
  4. Aiyagari, S. Rao & Christiano, Lawrence J. & Eichenbaum, Martin, 1992. "The output, employment, and interest rate effects of government consumption," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 73-86, October.
  5. Ambler, Steve & Paquet, Alain, 1994. "Stochastic Depreciation and the Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 101-16, February.
  6. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 519-39, August.
  7. Anton Braun, R., 1994. "Tax disturbances and real economic activity in the postwar United States," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 441-462, June.
  8. Ellen R. McGrattan, 1991. "The macroeconomic effects of distortionary taxation," Discussion Paper / Institute for Empirical Macroeconomics 37, Federal Reserve Bank of Minneapolis.
  9. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  10. Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers 885, C.E.P.R. Discussion Papers.
  11. Ambler, Steve & Desruelle, Dominique, 1991. "Time inconsistency in time-dependent team games," Economics Letters, Elsevier, vol. 37(1), pages 1-6, September.
  12. Jang-Ok Cho & Louis Phaneuf, 1993. "A business cycle model with nominal wage contracts and government," Discussion Paper / Institute for Empirical Macroeconomics 80, Federal Reserve Bank of Minneapolis.
  13. Steve Ambler & Alain Paquet, 1992. "Stochastic Depreciation and the Business Cycle Puzzle," Cahiers de recherche CREFE / CREFE Working Papers 8, CREFE, Université du Québec à Montréal.
  14. Alain Paquet, 1993. "Dépenses publiques et taxation proportionnelle dans les modèles réels du cycle," Cahiers de recherche CREFE / CREFE Working Papers 17, CREFE, Université du Québec à Montréal.
  15. Bernheim, B Douglas, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 540-42, August.
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Citations

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Cited by:
  1. Steve Ambler & Emanuela Cardia, 1998. "The Cyclical Behaviour of Wages and Profits under Imperfect Competition," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 148-164, February.
  2. Emanuel Gasteiger & Shoujian Zhang, 2013. "Anticipation, Learning and Welfare: the Case of Distortionary Taxation," CDMA Working Paper Series 201301, Centre for Dynamic Macroeconomic Analysis.
  3. George Economides & Jim Malley & Apostolis Philippopoulos & Ulrich Woitek, 2003. "Electoral Uncertainty, Fiscal Policies and Growth: Theory and Evidence from Germany, the UK and the US," Working Papers 2003_16, Business School - Economics, University of Glasgow.
  4. Kevin J. Lansing, 1994. "Optimal fiscal policy when public capital is productive: a business- cycle perspective," Working Paper 9406, Federal Reserve Bank of Cleveland.
  5. Canton, E.J.F., 1997. "Fiscal Policy in a Stochastic Model of Endogenous Growth," Discussion Paper 1997-63, Tilburg University, Center for Economic Research.
  6. Stephen Turnovsky, 1998. "Productive Government Expenditure in a Stochastically Growing Economy," Working Papers 0056, University of Washington, Department of Economics.
  7. Jim Malley & Apostolis Philippopoulos, 1999. "Economic Growth And Endogenous Fiscal Policy: In Search Of A Data Consistent General Equilibrium Model," Working Papers 1999_18, Business School - Economics, University of Glasgow, revised Jan 1998.
  8. Jim Malley & Apostolis Philippopoulos, 1999. "A note on testing for tax-smoothing in general equilibrium," Working Papers 1999_17, Business School - Economics, University of Glasgow.
  9. Malley, Jim & Philippopoulos, Apostolis & Economides, George, 2002. "Testing for tax smoothing in a general equilibrium model of growth," European Journal of Political Economy, Elsevier, vol. 18(2), pages 301-315, June.
  10. Stephen Turnovsky, 1998. "On the Role of Government in a Stochastically Growing Open Economy," Working Papers 0073, University of Washington, Department of Economics.
  11. Alain Paquet & Benoit Robidoux, 1997. "Issues on the Measurement of the Solow Residual and the Testing of its Exogeneity: a Tale of Two Countries," Cahiers de recherche CREFE / CREFE Working Papers 51, CREFE, Université du Québec à Montréal.

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