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Public Consumption Over the Business Cycle

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  • Ruediger Bachmann
  • Jinhui Bai

Abstract

What fraction of the business cycle volatility of government purchases is accounted for as endogenous reactions to overall macroeconomic conditions? We answer this question in the framework of a neoclassical representative household model where the provision of a public consumption good is decided upon endogenously and in a time-consistent fashion. A simple frictionless version of such a model with aggregate productivity as the sole driving force can explain almost all the volatility of U.S. non-defense government consumption expenditures. However, such a model fails to match other important features of the business cycle dynamics of public consumption, which comes out as not persistent enough and too synchronized with the cycle. We add implementation lags and implementation costs in the budgeting process to the model, plus taste shocks for public consumption relative to private consumption, and achieve a substantially better match to the data. All these ingredients are essential to improve the fit. Depending on the precise specification of the flow utility function over private consumption, public consumption and leisure, 25-40 percent of the variance of public consumption is driven by aggregate productivity shocks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17230.

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Date of creation: Jul 2011
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Handle: RePEc:nbr:nberwo:17230

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References

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  1. Marco Battaglini & Stephen Coate, 2006. "A Dynamic Theory of Public Spending, Taxation and Debt," NBER Working Papers 12100, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Public consumption and the business cycle
    by Economic Logician in Economic Logic on 2011-08-18 14:49:00
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Cited by:
  1. Marina Azzimonti, 2011. "The dynamics of public investment under persistent electoral advantage," Working Papers 11-23, Federal Reserve Bank of Philadelphia.
  2. Eric Sims & Ruediger Bachmann, 2011. "Confidence and the Transmission of Government Spending Shocks," 2011 Meeting Papers 83, Society for Economic Dynamics.
  3. Ruediger Bachmann & Jinhui Bai, 2013. "Politico-Economic Inequality and the Comovement of Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 565-580, October.
  4. Anderson L. Schneider & Facundo Piguillem, 2008. "Heterogeneous Labor Skills, The Median Voter and Labor Taxes," 2008 Meeting Papers 835, Society for Economic Dynamics.

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