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An analysis of government spending in the frequency domain

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  • Darrel Cohen
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    Abstract

    This paper utilizes frequency-domain techniques to identify and characterize economically important properties of government spending. Using post-war data for the United States, the paper first identifies peaks in the estimated spectra of the major components of fiscal spending. Second, the paper examines the relationship between these fiscal variables and various measures of aggregate economic activity. The analysis reveals that defense spending is best modeled as exogenous with respect to the aggregate economy and that nondefense spending (growth) appears to be white noise. Further, the unemployment rate has a very high coherency at the business cycle frequencies with unemployment insurance but far smaller coherency with other transfer payments. Finally, the paper finds a moderate degree of direct substitutability between certain types of government spending and private consumption and in the process illustrates how spectral techniques can be readily combined with a standard intertemporal optimizing model.

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    File URL: http://www.federalreserve.gov/pubs/feds/1999/199926/199926abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/1999/199926/199926pap.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-26.

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    Date of creation: 1999
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    Handle: RePEc:fip:fedgfe:1999-26

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    Keywords: Expenditures; Public ; Econometric models;

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    1. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, vol. 73(5), pages 994-1010, December.
    2. Engle, Robert F, 1974. "Band Spectrum Regression," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(1), pages 1-11, February.
    3. Martin Eichenbaum & Jonas D.M. Fisher, 1998. "How does an increase in government purchases affect economy?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 29-43.
    4. Graham, Fred C, 1995. "Government Debt, Government Spending, and Private-Sector Behavior: Comment," American Economic Review, American Economic Association, vol. 85(5), pages 1348-56, December.
    5. Kormendi, Roger C & Meguire, Philip, 1986. "Government Debt, Government Spending, and Private Sector Behavior: Reply," American Economic Review, American Economic Association, vol. 76(5), pages 1180-87, December.
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    Cited by:
    1. Darrel Cohen & Glenn Follette, 2000. "The automatic fiscal stabilizers: quietly doing their thing," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 35-67.
    2. Olivier Blanchard, 2000. "The automatic fiscal stabilizers: quietly doing their thing - commentary," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 69-74.

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