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Government employment and the dynamic effects of fiscal policy shocks

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Author Info
Michele P. Cavallo
Abstract

Since World War II, about 75 percent of government consumption in the U.S. economy has been spent on labor services. I distinguish the goods and the employment compensation components of government consumption in assessing the effects of fiscal shocks on main macroeconomic variables. Identifying exogenous fiscal shocks with the onset of military buildups, I show that they lead to a significant increase in hours worked and output in the government sector. Allowing for the distinction between the two components of government consumption improves the quantitative performance of the neoclassical model. In particular, the model with government employment does a good job at accounting for the dynamic response of private consumption to a fiscal policy shock. Government employment compensation acts as a transfer payment for households, thereby mitigating the wealth effect on consumption and labor supply associated with fiscal shocks.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Papers in Applied Economic Theory with number 2005-16.

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Date of creation: 2005
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Handle: RePEc:fip:fedfap:2005-16

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Keywords: Government employees ; Employment ; Consumption (Economics);

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  1. Antonio Afonso & Peter Claeys, 2007. "The dynamic behaviour of budget components and output," Working Paper Series 775, European Central Bank. [Downloadable!]
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  2. Athanasios Tagkalakis, 2006. "The effects of macroeconomic policy shocks on the UK labour market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(3), pages 229-244. [Downloadable!]
  3. António Afonso & Peter Claeys, 2006. "The dynamic behaviour of budget components and output – the cases of France, Germany, Portugal, and Spain," Working Papers 2006/26, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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