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Productive government spending and private consumption: a pessimistic view

  • Juha Tervala

    ()

    (University of Helsinki)

This paper analyses the consequences of productive government spending on private consumption. In a related work, Linnemann and Schabert (2006) found that a moderate output elasticity of government expenditures is sufficient to generate a positive consumption response to a fiscal shock. It is shown in this paper that pessimism as to the ability of productive government spending to account for an empirically observed positive consumption response is in order because a balanced budget increase in government spending increases private consumption only if the productivity of government spending is relatively high. For realistic values of the output elasticity of government spending, a positive consumption response is ruled out.

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File URL: http://www.accessecon.com/Pubs/EB/2009/Volume29/EB-09-V29-I1-P43.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 1 ()
Pages: 416-425

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Handle: RePEc:ebl:ecbull:eb-08h30005
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  1. Ludger Linnemann & Andreas Schabert, 2006. "Productive Government Expenditure In Monetary Business Cycle Models," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(1), pages 28-46, 02.
  2. Mountford, Andrew & Uhlig, Harald, 2002. "What are the Effects of Fiscal Policy Shocks?," CEPR Discussion Papers 3338, C.E.P.R. Discussion Papers.
  3. Domeij, David & Floden, Martin, 2001. "The labor-supply elasticity and borrowing constraints: Why estimates are biased," SSE/EFI Working Paper Series in Economics and Finance 480, Stockholm School of Economics.
  4. Jordi Galí & J. David López-Salido, 2003. "Understanding the Effects of Government Spending on Consumption," Working Papers 73, Barcelona Graduate School of Economics.
  5. Hafedh Bouakez & Nooman Rebei, 2003. "Why Does Private Consumption Rise After a Government Spending Shock?," Working Papers 03-43, Bank of Canada.
  6. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  7. Ganelli, Giovanni & Tervala, Juha, 2009. "Can government spending increase private consumption? The role of complementarity," Economics Letters, Elsevier, vol. 103(1), pages 5-7, April.
  8. Linnemann, Ludger & Schabert, Andreas, 2004. "Can fiscal spending stimulate private consumption?," Economics Letters, Elsevier, vol. 82(2), pages 173-179, February.
  9. Evans, Paul & Karras, Georgios, 1994. "Are Government Activities Productive? Evidence from a Panel of U.S. States," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 1-11, February.
  10. Miles S. Kimball & Matthew D. Shapiro, 2008. "Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?," NBER Working Papers 14208, National Bureau of Economic Research, Inc.
  11. Giovanni Ganelli, 2007. "The Effects Of Fiscal Shocks On Consumption: Reconciling Theory And Data," Manchester School, University of Manchester, vol. 75(2), pages 193-209, 03.
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