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Industry Evidence on the Effects of Government Spending

  • Christopher J. Nekarda
  • Valerie A. Ramey

This paper investigates the effects of government purchases at the industry level in order to shed light on the transmission mechanism for government spending on the aggregate economy. We create a new panel dataset that matches output and labor variables to industry-specific shifts in government demand. An increase in government demand raises output and hours, lowers real product wages and labor productivity, and has no effect on the markup. The estimates also imply approximately constant returns to scale. The findings are more consistent with the effects of government spending in the neoclassical model than the textbook New Keynesian model. (JEL E12, E23, E62, H50)

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 3 (2011)
Issue (Month): 1 (January)
Pages: 36-59

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Handle: RePEc:aea:aejmac:v:3:y:2011:i:1:p:36-59
Note: DOI: 10.1257/mac.3.1.36
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. Christopher J. Nekarda & Valerie A. Ramey, 2013. "The Cyclical Behavior of the Price-Cost Markup," NBER Working Papers 19099, National Bureau of Economic Research, Inc.
  2. Yongsung Chang & Jay H. Hong, 2006. "Do Technological Improvements in the Manufacturing Sector Raise or Lower Employment?," American Economic Review, American Economic Association, vol. 96(1), pages 352-368, March.
  3. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Business Cycles and the Relationship Between Concentration and Price-Cost Margins," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 1-17, Spring.
  4. Barro, Robert J., 1981. "Output Effects of Government Purchases," Scholarly Articles 3451294, Harvard University Department of Economics.
  5. repec:att:wimass:9116 is not listed on IDEAS
  6. Basu, Susanto, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 719-51, August.
  7. Min Ouyang, 2011. "On the Cyclicality of R&D," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 542-553, May.
  8. Kline, Patrick, 2008. "Understanding Sectoral Labor Market Dynamics: An Equilibrium Analysis of the Oil and Gas Field Services Industry," Working Papers 43, Yale University, Department of Economics.
  9. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
  10. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
  11. Devereux, Michael B & Head, Allen C & Lapham, Beverly J, 1996. "Monopolistic Competition, Increasing Returns, and the Effects of Government Spending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 233-54, May.
  12. Evi Pappa, 2005. "New Keynesian or RBC Transmission? The Effects of Fiscal Policy in Labor Markets," Working Papers 293, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  13. Shea, John, 1993. "Do Supply Curves Slope Up?," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 1-32, February.
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