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Government Spending and Durable Goods

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  • Christopher E. Boehm

Abstract

This paper shows that the fiscal multiplier for purchases of durable and investment goods is very small - much smaller than the multiplier for nondurable goods. Standard models predict small durables multipliers because private sector purchases of durable goods are highly intertemporally substitutable and therefore easily crowded out. Empirical estimates based on U.S. data confirm this result. In aggregate time series data output rises by about 50 cents less if the government purchases 1$ of durable rather than nondurable goods. At the industry level, spending on durable goods leads to smaller sectoral expansions than spending on nondurable goods. The findings of this paper suggest that infrastructure spending which is frequently part of fiscal stimulus packages is relatively ineffective at raising aggregate demand.

Suggested Citation

  • Christopher E. Boehm, 2016. "Government Spending and Durable Goods," CESifo Working Paper Series 6244, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6244
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp6244.pdf
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    References listed on IDEAS

    as
    1. Rendahl, P., 2012. "Fiscal Policy in an Unemployment Crisis," Cambridge Working Papers in Economics 1211, Faculty of Economics, University of Cambridge.
    2. David CASHIN & UNAYAMA Takashi, 2012. "Short-run Distributional Effects of VAT Rate Change: Evidence from a consumption tax rate increase in Japan," Discussion papers 12029, Research Institute of Economy, Trade and Industry (RIETI).
    3. Jordi GalĂ­, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters,in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework Princeton University Press.
    4. Robert E. Hall, 2009. "By How Much Does GDP Rise If the Government Buys More Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 183-249.
    5. Michael T. Owyang & Valerie A. Ramey & Sarah Zubairy, 2013. "Are Government Spending Multipliers Greater during Periods of Slack? Evidence from Twentieth-Century Historical Data," American Economic Review, American Economic Association, vol. 103(3), pages 129-134, May.
    6. Hausman, Joshua K., 2016. "What Was Bad for General Motors Was Bad for America: The Automobile Industry and the 1937/38 Recession," The Journal of Economic History, Cambridge University Press, vol. 76(02), pages 427-477, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    durable goods; fiscal policy; government spending; fiscal multiplier;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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