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Fiscal Spending Shocks, Endogenous Government Spending and Real Business Cycles

We consider the effects of fiscal spending shocks in a real business model when a portion of government spending is endogenized and chosen to maximize the utility of the representative private agent. Endogenous spending partially neutralizes the effects of both exogenous fiscal spending shocks and technology shocks. When we calibrate the standard deviation of exogenous fiscal spending shocks in order to reproduce the observed volatility of total fiscal spending, the model predicts a correlation between total hours and labor productivity that is significantly closer to U.S. data than standard real business cycle models. Ce texte analyse les effets de chocs de dépenses fiscales dans un modèle du cycle d'origine réel où les dépenses gouvernementales sont en partie endogènes. Celles-ci sont choisies par le gouvernement pour maximiser la fonction d'utilité d'un agent privé représentatif. Nous montrons que les dépenses publiques endogènes neutralisent partiellement les effets combinés des chocs technologiques et des chocs fiscaux exogènes. Quand nous étalonnons l'écart-type des chocs et des dépenses publiques exogènes pour reproduire la volatilité observée des dépenses gouvernementales totales, le modèle prédit une corrélation entre les heures totales travaillées et la productivité moyenne du travail qui se rapproche significativement plus de la valeur observée dans les données américaines que ce n'est le cas pour les modèles standards du cycle d'origine réel.

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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 14.

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Length: 30 pages
Date of creation: May 1993
Date of revision:
Publication status: Published, Journal of Economic Dynamics and Control, 20(1), pages 237-256, 1996
Handle: RePEc:cre:crefwp:14
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  1. Anton Braun, R., 1994. "Tax disturbances and real economic activity in the postwar United States," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 441-462, June.
  2. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1991. "Optimal fiscal and monetary policy: some recent results," Proceedings, Federal Reserve Bank of Cleveland, pages 519-546.
  3. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  4. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Working Paper Series, Macroeconomic Issues 90, Federal Reserve Bank of Chicago.
  5. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
  6. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  7. William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
  8. S. Rao Aiyagari & Lawrence J. Christiano & Martin Eichenbaum, 1990. "The output, employment, and interest rate effects of government consumption," Working Papers 456, Federal Reserve Bank of Minneapolis.
  9. Steve Ambler & Alain Paquet, 1994. "Recursive Methods for Computing Equilibria of General Equilibrium Dynamic Stackelberg Games," Cahiers de recherche CREFE / CREFE Working Papers 25, CREFE, Université du Québec à Montréal.
  10. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  11. Louis Phaneuf & Jang-Ok Cho, 1992. "A Business Cycle Model with Nominal Wage Contracts and Government," Cahiers de recherche CREFE / CREFE Working Papers 6, CREFE, Université du Québec à Montréal, revised Jan 1993.
  12. Cho, J-O. & Cooley, T.F., 1988. "Employment And Hours Over The Business Cycle," Papers 88-03, Rochester, Business - General.
  13. Alain Paquet, 1993. "Dépenses publiques et taxation proportionnelle dans les modèles réels du cycle," Cahiers de recherche CREFE / CREFE Working Papers 17, CREFE, Université du Québec à Montréal.
  14. Steve Ambler & Alain Paquet, 1992. "Stochastic Depreciation and the Business Cycle Puzzle," Cahiers de recherche CREFE / CREFE Working Papers 8, CREFE, Université du Québec à Montréal.
  15. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  16. Ambler, Steve & Paquet, Alain, 1994. "Stochastic Depreciation and the Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 101-16, February.
  17. Ambler, Steve & Desruelle, Dominique, 1991. "Time inconsistency in time-dependent team games," Economics Letters, Elsevier, vol. 37(1), pages 1-6, September.
  18. Ellen R. McGrattan, 1991. "The macroeconomic effects of distortionary taxation," Discussion Paper / Institute for Empirical Macroeconomics 37, Federal Reserve Bank of Minneapolis.
  19. Bernheim, B Douglas, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 540-42, August.
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