Government spending, consumption, and the extensive investment margin
We find VAR evidence that a rise in US government spending boosts consumption and firm entry. The joint dynamics observed in the data poses a puzzle for business cycle models with endogenous entry (extensive-margin investment). Persistent spending expansions generate entry but crowd out consumption through a negative wealth effect. Model features that dampen the wealth effect, such as credit-constrained consumers or non-separable preferences, reduce entry. This leads to weaker competition in oligopolistic markets, such that markups rise and consumption falls. The model captures the joint dynamics if labor supply is very elastic or public and private consumption are complements.
|Date of creation:||Apr 2013|
|Date of revision:|
|Contact details of provider:|| Postal: Naamsestraat 69, 3000 Leuven|
Phone: +32-(0)16-32 67 25
Fax: +32-(0)16-32 67 96
Web page: http://www.econ.kuleuven.be/ew
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ete:ceswps:ces13.09. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Karla Vander Weyden)
If references are entirely missing, you can add them using this form.