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Industry Evidence on the Effects of Government Spending

  • Christopher J. Nekarda
  • Valerie A. Ramey

This paper investigates industry-level effects of government purchases in order to shed light on the transmission mechanism for government spending on the aggregate economy. We begin by highlighting the different theoretical predictions concerning the effects of government spending on industry labor market equilibrium. We then create a panel data set that matches output and labor variables to shifts in industry-specific government demand. The empirical results indicate that increases in government demand raise output and hours, but lower real product wages and productivity. Markups do not change as a result of government demand increases. The results are consistent with the neoclassical model of government spending, but they are not consistent with the New Keynesian model of the effects of government spending.

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File URL: http://www.nber.org/papers/w15754.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15754.

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Date of creation: Feb 2010
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Publication status: published as Christopher J. Nekarda & Valerie A. Ramey, 2011. "Industry Evidence on the Effects of Government Spending," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 36-59, January.
Handle: RePEc:nbr:nberwo:15754
Note: EFG ME
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Kline, Patrick, 2008. "Understanding Sectoral Labor Market Dynamics: An Equilibrium Analysis of the Oil and Gas Field Services Industry," Working Papers 43, Yale University, Department of Economics.
  2. Susanto Basu, 1995. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," NBER Working Papers 5336, National Bureau of Economic Research, Inc.
  3. Shea, J., 1991. "Do Supply Curves Slope Up?," Working papers 9116, Wisconsin Madison - Social Systems.
  4. Barro, Robert J., 1981. "Output Effects of Government Purchases," Scholarly Articles 3451294, Harvard University Department of Economics.
  5. Yongsung Chang & Jay H. Hong, 2006. "Do Technological Improvements in the Manufacturing Sector Raise or Lower Employment?," American Economic Review, American Economic Association, vol. 96(1), pages 352-368, March.
  6. Christopher J. Nekarda & Valerie A. Ramey, 2013. "The Cyclical Behavior of the Price-Cost Markup," NBER Working Papers 19099, National Bureau of Economic Research, Inc.
  7. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Business Cycles and the Relationship Between Concentration and Price-Cost Margins," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 1-17, Spring.
  8. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, vol. 115(1), pages 89-117, March.
  9. Devereux, Michael B & Head, Allen C & Lapham, Beverly J, 1996. "Monopolistic Competition, Increasing Returns, and the Effects of Government Spending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 233-54, May.
  10. Min Ouyang, 2011. "On the Cyclicality of R&D," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 542-553, May.
  11. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
  12. Evi Pappa, 2005. "New Keynesian or RBC Transmission? The Effects of Fiscal Policy in Labor Markets," Working Papers 293, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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