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Cyclical Effects of the Composition of Government Purchases

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  • Jahangir Aziz

    (International Monetary Fund)

  • Luc Leruth

    (IMF and The University of Leige)

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    Abstract

    This paper constructs a general equilibrium model with monopolistically competitive firms and endogenous markups where government spending consists of both consumption and investment goods. It is shown that when markups are countercyclical, an increase in the share of investment goods in total public expenditure, raises output, employment, and capital stock in the long-run leading to increases in welfare and productivity. However, this also raises the short run cyclical variability of the economy. In particular, variance of output and employment arising from technological and aggregate demand shocks increase as the long run share of government investment goes up implying a trade-off between greater long-run efficiency and higher short-run volatility.

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    File URL: http://128.118.178.162/eps/mac/papers/9902/9902007.tex
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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 9902007.

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    Length: 35 pages
    Date of creation: 11 Feb 1999
    Date of revision:
    Handle: RePEc:wpa:wuwpma:9902007

    Note: Type of Document - Tex; prepared on IBM PC ; to print on HP/PostScript/Franciscan monk; pages: 35; figures: included/request from author/draw your own
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    Web page: http://128.118.178.162

    Related research

    Keywords: government-spending business-cycles;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Susanto Basu, 1994. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," NBER Working Papers 4817, National Bureau of Economic Research, Inc.
    2. Julio J. Rotemberg & Michael Woodford, 1989. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," NBER Working Papers 3206, National Bureau of Economic Research, Inc.
    3. Joaquim Oliveira Martins & Stefano Scarpetta & Dirk Pilat, 1996. "Mark-Up Ratios in Manufacturing Industries: Estimates for 14 OECD Countries," OECD Economics Department Working Papers 162, OECD Publishing.
    4. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
    5. Domowitz, Ian & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 55-66, February.
    6. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
    7. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
    8. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
    9. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18.
    10. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
    11. Royen, M.-C., 1998. "Impact of a Change in Public Spending Policies on Margins and Business Cycles in OECD Countries," Liege - Groupe d'Etude des Mathematiques du Management et de l'Economie 9819, UNIVERSITE DE LIEGE, Faculte d'economie, de gestion et de sciences sociales, Groupe d'Etude des Mathematiques du Management et de l'Economie.
    12. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
    13. Charles L. Evans, 1991. "Productivity shocks and real business cycles," Working Paper Series, Macroeconomic Issues 91-22, Federal Reserve Bank of Chicago.
    14. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October.
    15. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
    16. Bils, Mark, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 699-718, November.
    17. Catherine J. Morrison, 1990. "Market Power, Economic Profitability and Productivity Growth Measurement: An Integrated Structural Approach," NBER Working Papers 3355, National Bureau of Economic Research, Inc.
    18. Julio J. Rotemberg & Michael Woodford, 1990. "Cyclical Markups: Theories and Evidence," NBER Working Papers 3534, National Bureau of Economic Research, Inc.
    19. Michael Woodford, 1990. "Self-Fulfilling Expectations and Fluctuations in Aggregate Demand," NBER Working Papers 3361, National Bureau of Economic Research, Inc.
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