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Sectoral Composition of Government Spending and Macroeconomic (In)stability

Author

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  • Juin-Jen Chang

    (Institute of Economics, Academia Sinica, Taipei, Taiwan)

  • Jang-Ting Guo

    (University of California, Riverside, CA, USA)

  • Jhy-Yuan Shieh

    (Department of Economics, Soochow University, Taipei, Taiwan)

  • Wei-Neng Wang

    (Department of Economics, Soochow University, Taipei, Taiwan)

Abstract

This paper examines the quantitative interrelations between sectoral composition of public spending and equilibrium (in)determinacy in a two-sector real business cycle model with positive productive externalities in investment. When government purchases of con- sumption and investment goods are set as constant fractions of their respective sectoral output, we show that the public-consumption share plays no role in the models local dynamics, and that a sufficiently high public-investment share can stabilize the economy against endogenous belief-driven cyclical uctuations. When each type of government spending is postulated as a constant proportion of the economys total output, we find that there exists a trade-off between public consumption versus investment expenditures to yield saddle-path stability and equilibrium uniqueness.

Suggested Citation

  • Juin-Jen Chang & Jang-Ting Guo & Jhy-Yuan Shieh & Wei-Neng Wang, 2013. "Sectoral Composition of Government Spending and Macroeconomic (In)stability," IEAS Working Paper : academic research 13-A010, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    • Handle: RePEc:sin:wpaper:13-a010
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    Cited by:

    1. Maxime Menuet & Alexandru Minea & Patrick Villieu, 2019. "The Peril of Fiscal Rules," Post-Print hal-02314996, HAL.
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    3. Maxime Menuet & Alexandru Minea & Patrick Villieu, 2019. "Budget Rules, Distortionnary Taxes, and Aggregate Instability: A reappraisal," Working Papers hal-02153856, HAL.
    4. Juin‐Jen Chang & Jang‐Ting Guo & Wei‐Neng Wang, 2021. "On Endogenous Business Cycles Under Increasing Returns To Variety And Sector‐Specific Externality," Economic Inquiry, Western Economic Association International, vol. 59(1), pages 532-548, January.

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    More about this item

    Keywords

    Government Spending; Equilibrium (In)determinacy; Business Cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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