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The composition of public spending and the inflationary effects of fiscal policy shocks

Author

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  • Klein, Mathias
  • Linnemann, Ludger

Abstract

The paper uses structural proxy-vector autoregressions to separately identify shocks to US government investment and government consumption expenditures. Positive public investment shocks robustly raise inflation and have a weak and insignificant impact on labor productivity. In contrast, positive public consumption shocks induce a significant fall in inflation together with a strong and persistent increase in hourly productivity. The empirical findings are consistent with a model where demand shocks have an endogenous effect on productivity due to variable technology utilization. Increases in government investment, despite adding to a productive public capital stock, induce a relatively low endogenous increase in productivity and goods supply in the short run and thus are inflationary, whereas government consumption shocks can lead to a temporary productivity increase and inflation decrease if technology utilization is relatively inexpensive to vary.

Suggested Citation

  • Klein, Mathias & Linnemann, Ludger, 2023. "The composition of public spending and the inflationary effects of fiscal policy shocks," European Economic Review, Elsevier, vol. 155(C).
    • Handle: RePEc:eee:eecrev:v:155:y:2023:i:c:s0014292123000892
    DOI: 10.1016/j.euroecorev.2023.104460
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    Citations

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    Cited by:

    1. Julie Ann Q. Basconcillo, 2023. "A nexus between fiscal policy and inflation: a case study of Indonesia using SVAR model," Public Sector Economics, Institute of Public Finance, vol. 47(4), pages 477-503.
    2. Sabaj, Ernil & Sbia, Rashid & Troug, Haytem, 2023. "Does it matter where and how governments spend?," Economics Letters, Elsevier, vol. 228(C).

    More about this item

    Keywords

    Government investment; Government consumption; Inflation; Endogenous productivity; Proxy-vector autoregressions;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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

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