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Government Spending and Private Activity

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  • Valerie A. Ramey

Abstract

This paper asks whether increases in government spending stimulate private activity. The first part of the paper studies private spending. Using a variety of identification methods and samples, I find that in most cases private spending falls significantly in response to an increase in government spending. These results imply that the average GDP multiplier lies below unity. In order to determine whether concurrent increases in tax rates dampen the spending multiplier, I use two different methods to adjust for tax effects. Neither method suggests significant effects of current tax rate changes on the spending multiplier. In the second part of the paper, I explore the effects of government spending on labor markets. I find that increases in government spending lower unemployment. Most specifications and samples imply, however, that virtually all of the effect is through an increase in government employment, not private employment. I thus conclude that on balance government spending does not appear to stimulate private activity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17787.

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Date of creation: Jan 2012
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Publication status: published as Government Spending and Private Activity , Valerie A. Ramey. in Fiscal Policy after the Financial Crisis , Alesina and Giavazzi. 2013
Handle: RePEc:nbr:nberwo:17787

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  1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
  2. Pedro Gomes, 2011. "Fiscal policy and the labour market: the effects of public sector employment and wages," European Economy - Economic Papers 439, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. JonasD.M. Fisher & Ryan Peters, 2010. "Using Stock Returns to Identify Government Spending Shocks," Economic Journal, Royal Economic Society, vol. 120(544), pages 414-436, 05.
  4. Cragg, John G. & Donald, Stephen G., 1993. "Testing Identifiability and Specification in Instrumental Variable Models," Econometric Theory, Cambridge University Press, vol. 9(02), pages 222-240, April.
  5. Daniel J. Wilson, 2010. "Fiscal spending multipliers: evidence from the 2009 American Recovery and Reinvestment Act," Working Paper Series 2010-17, Federal Reserve Bank of San Francisco.
  6. Brückner, Markus & Pappa, Evi, 2010. "Fiscal expansions affect unemployment, but they may increase it," CEPR Discussion Papers 7766, C.E.P.R. Discussion Papers.
  7. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
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Cited by:
  1. Crafts, Nicholas & Mills, Terence, 2013. "Rearmament to the Rescue? New Estimates of the Impact of ‘Keynesian’ Policies in 1930s’ Britain," The Warwick Economics Research Paper Series (TWERPS) 1018, University of Warwick, Department of Economics.
  2. Carlos Esteban Posada P., 2013. "Los efectos macroeconómicos de la política fiscal y del cambio técnico: predicciones de un modelo de equilibrio general dinámico," DOCUMENTOS CEDE 011459, UNIVERSIDAD DE LOS ANDES-CEDE.
  3. Felix Reichling & Charles Whalen, 2012. "Assessing the Short-Term Effects on Output of Changes in Federal Fiscal Policies: Working Paper 2012-08," Working Papers 43278, Congressional Budget Office.

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