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Sectoral Composition of Government Spending and Macroeconomic (In)stability

  • Juin-Jen Chang

    ()

    (Institute of Economics, Academia Sinica, Taipei, Taiwan)

  • Jang-Ting Guo

    ()

    (University of California, Riverside, CA, USA)

  • Jhy-Yuan Shieh

    ()

    (Department of Economics, Soochow University, Taipei, Taiwan)

  • Wei-Neng Wang

    ()

    (Department of Economics, Soochow University, Taipei, Taiwan)

This paper examines the quantitative interrelations between sectoral composition of public spending and equilibrium (in)determinacy in a two-sector real business cycle model with positive productive externalities in investment. When government purchases of con- sumption and investment goods are set as constant fractions of their respective sectoral output, we show that the public-consumption share plays no role in the models local dynamics, and that a sufficiently high public-investment share can stabilize the economy against endogenous belief-driven cyclical uctuations. When each type of government spending is postulated as a constant proportion of the economys total output, we find that there exists a trade-off between public consumption versus investment expenditures to yield saddle-path stability and equilibrium uniqueness.

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File URL: http://www.econ.sinica.edu.tw/UpFiles/2013092817175327692/Seminar_PDF2013093010102890633/13-A010(all).pdf
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Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 13-A010.

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Length: 20 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:sin:wpaper:13-a010
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