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Government Consumption and Investment: Does the Composition of Purchases Affect the Multiplier?

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  • Christoph E. Boehm

    (University of Texas, Austin)

Abstract

I show that a large and conventional class of macroeconomic models predicts that short-lived government investment shocks have a much smaller fiscal multiplier than government consumption shocks. I test this prediction in a panel of OECD countries using real-time forecasts of government consumption and investment to purify changes in purchases of their predicted components. Consistent with theory, I estimate a government investment multiplier near zero and a government consumption multiplier of approximately 0.8. These findings suggest that fiscal stimulus packages which contain large government investment components may not be as effective at stimulating aggregate demand as commonly thought.

Suggested Citation

  • Christoph E. Boehm, 2018. "Government Consumption and Investment: Does the Composition of Purchases Affect the Multiplier?," Working Papers 662, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:662
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    Cited by:

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    2. Laurent Ferrara & Luca Metelli & Filippo Natoli & Daniele Siena, 2020. "Questioning the puzzle: Fiscal policy, exchange rate and inflation," Working papers 752, Banque de France.
    3. Fernando Broner & Alberto Martin & Jaume Ventura, 2021. "On Public Spending and Economic Unions," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(1), pages 122-154, March.
    4. Cox, Lydia & Müller, Gernot & Pasten, Ernesto & Schoenle, Raphael & Weber, Michael, 2020. "Big G," CEPR Discussion Papers 14625, C.E.P.R. Discussion Papers.
      • Lydia Cox & Gernot Müller & Ernesto Pastén & Raphael Schoenle & Michael Weber, 2020. "Big G," NBER Working Papers 27034, National Bureau of Economic Research, Inc.
      • Lydia Cox & Gernot Muller & Ernesto Pasten & Raphael Schoenle & Michael Weber, 2020. "Big G," Working Papers Central Bank of Chile 878, Central Bank of Chile.
      • Lydia Cox & Gernot J. Müller & Ernesto Pasten & Raphael Schoenle & Michael Weber, 2020. "Big G," Working Papers 2020-36, Becker Friedman Institute for Research In Economics.
      • , 2020. "Big G," Working Papers 202015, Federal Reserve Bank of Cleveland.
      • Lydia Cox & Gernot Müller & Ernesto Pasten & Raphael S. Schoenle & Michael Weber & Michael Weber, 2020. "Big G," CESifo Working Paper Series 8229, CESifo.
    5. Lemoine, Matthieu & Lindé, Jesper, 2020. "Fiscal Stimulus in Liquidity Traps: Conventional or Unconventional Policies?," CEPR Discussion Papers 15623, C.E.P.R. Discussion Papers.
    6. Hebous, Shafik & Zimmermann, Tom, 2021. "Can government demand stimulate private investment? Evidence from U.S. federal procurement," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 178-194.
    7. Shafik Hebous & Tom Zimmermann, 2019. "Can government demand stimulate private investment? Evidence from U.S. federal procurement," CESifo Working Paper Series 7534, CESifo.
    8. Deleidi, Matteo & Mazzucato, Mariana, 2021. "Directed innovation policies and the supermultiplier: An empirical assessment of mission-oriented policies in the US economy," Research Policy, Elsevier, vol. 50(2).
    9. Hickey, Rónán & Lozej, Matija & Smyth, Diarmaid, 2020. "Financing government investment and its implications for public capital: A small open economy perspective," Economic Modelling, Elsevier, vol. 93(C), pages 620-641.
    10. Valerie A. Ramey, 2020. "The Macroeconomic Consequences of Infrastructure Investment," NBER Chapters, in: Economic Analysis and Infrastructure Investment, National Bureau of Economic Research, Inc.
    11. Hebous, Shafik & Zimmermann, Tom, 2021. "Can government demand stimulate private investment? Evidence from U.S. federal procurement," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 178-194.
    12. Tom Krebs, 2020. "Ein Investitionspaket ist das beste Konjunkturpaket," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 100(7), pages 497-500, July.

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    More about this item

    Keywords

    Fiscal multiplier; Durable goods; Investment; Government spending; Government investment; Government consumption;
    All these keywords.

    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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