Government spending, consumption, and the extensive investment margin
AbstractWe find VAR evidence that a rise in US government spending boosts consumption and firm entry. The joint dynamics observed in the data poses a puzzle for business cycle models with endogenous entry (extensive-margin investment). Persistent spending expansions generate entry but crowd out consumption through a negative wealth effect. Model features that dampen the wealth effect, such as credit-constrained consumers or non-separable preferences, reduce entry. This leads to weaker competition in oligopolistic markets, such that markups rise and consumption falls. The model captures the joint dynamics if labor supply is very elastic or public and private consumption are complements.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces13.09.
Date of creation: Apr 2013
Date of revision:
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Karla Vander Weyden).
If references are entirely missing, you can add them using this form.