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The International Effects of Government Spending Composition

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  • Giovanni Ganelli

Abstract

This paper helps resolve a paradox in the literature, noticed by Alesina and Perotti (1995), which is that, although government employment is an important component of public spending, the debate on the effects of fiscal policy focuses almost exclusively on shocks to non-wage government consumption. We incorporate the distinction between spending for government employment and spending for non-wage government consumption in a "new open economy macroeconomics" model. Our results show that a permanent reduction in public employment in one country reduces relative private consumption and appreciates the domestic exchange rate if it is matched by a reduction in taxes. When the reduction in public employment is used to finance increased non-wage government consumption, the macroeconomic effects results are ambiguous, and are affected by the initial level of the public wage bill.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/4.

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Length: 18
Date of creation: 01 Jan 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/4

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Related research

Keywords: Government expenditures; Economic models; employment; equation; public employment; government employment; equations; optimization; private employment; full employment; employment retrenchment; full-employment; domestic employment; public sector employment; supply equation; survey; employment source;

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References

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  1. J. Galí & D. López-Salido & J. Vallés, 2003. "Understanding the effects of government spending on consumption," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  2. Frederick van der Ploeg, 2003. "Rolling Back the Public Sector - Differential Effects on Employment, Investment and Growth," CESifo Working Paper Series 890, CESifo Group Munich.
  3. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.
  4. Ganelli, Giovanni, 2003. "The New Open Economy Macroeconomics of Government Debt," Royal Economic Society Annual Conference 2003 83, Royal Economic Society.
  5. Lane, P.R. & Ganelli, G., 2002. "Dynamic General Equilibrium Analysis: The Open Economy Dimension," CEG Working Papers 20026, Trinity College Dublin, Department of Economics.
  6. Andrew Mountford & Harald Uhlig, 2005. "What are the Effects of Fiscal Policy Shocks?," SFB 649 Discussion Papers SFB649DP2005-039, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  7. Ganelli, Giovanni, 2003. "Useful government spending, direct crowding-out and fiscal policy interdependence," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 87-103, February.
  8. repec:fth:coluec:754 is not listed on IDEAS
  9. Lane, P, 1999. "The New Open Economy Macroeconomics: A Survey," Trinity Economics Papers 993, Trinity College Dublin, Department of Economics.
  10. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  11. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
  12. Lane, Philip R. & Perotti, Roberto, 2003. "The importance of composition of fiscal policy: evidence from different exchange rate regimes," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2253-2279, September.
  13. Hau, Harald, 2000. "Exchange rate determination: The role of factor price rigidities and nontradeables," Journal of International Economics, Elsevier, vol. 50(2), pages 421-447, April.
  14. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  15. Finn, Mary G, 1998. "Cyclical Effects of Government's Employment and Goods Purchases," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 635-57, August.
  16. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Economics Working Papers 015, European Network of Economic Policy Research Institutes.
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Citations

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Cited by:
  1. Alper, C. Emre & Ardic, Oya Pinar & Mumcu, Ayşe & Saglam, Ismail, 2006. "The welfare effects of government's preferences over spending and its financing," MPRA Paper 1911, University Library of Munich, Germany, revised Jan 2007.
  2. Szarowska, Irena, 2011. "Development and the cyclicality of government spending in the Czech Republic," MPRA Paper 32353, University Library of Munich, Germany.
  3. Michele Cavallo, 2005. "Government consumption expenditures and the current account," Working Paper Series 2005-03, Federal Reserve Bank of San Francisco.

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