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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. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1991. "Optimal fiscal and monetary policy: some recent results," Proceedings, Federal Reserve Bank of Cleveland, pages 519-546.
  2. 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.
  3. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Working Paper Series, Macroeconomic Issues 90, Federal Reserve Bank of Chicago.
  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. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
  6. 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.
  7. 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.
  8. Ambler, Steve & Desruelle, Dominique, 1991. "Time inconsistency in time-dependent team games," Economics Letters, Elsevier, vol. 37(1), pages 1-6, September.
  9. 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.
  10. 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.
  11. 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.
  12. Ellen R. McGrattan, 1991. "The macroeconomic effects of distortionary taxation," Discussion Paper / Institute for Empirical Macroeconomics 37, Federal Reserve Bank of Minneapolis.
  13. 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.
  14. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  15. 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.
  16. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
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