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Sectoral Composition of Government Spending and Macroeconomic (In)stability

  • Jang-Ting Guo


    (Department of Economics, University of California Riverside)

  • Juin-Jen Chang


    (Academia Sinica)

  • Jhy-Yuan Shieh


    (Soochow University)

  • Wei-Neng Wang


    (Soochow University)

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 consumption 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 model's local dynamics, and that a sufficiently high public-investment share can stabilize the economy against endogenous belief-driven cyclical aÌuctuations. When each type of government spending is postulated as a constant proportion of the economyiÌs total output, we find that there exists a trade-o§ between public consumption versus investment expenditures to yield saddle-path stability and equilibrium uniqueness.

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Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 201305.

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Date of creation: Sep 2013
Date of revision: Sep 2013
Handle: RePEc:ucr:wpaper:201305
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  1. Sharon Harrison & Jang-Ting Guo, 2008. "Indeterminacy with No-Income-Effect Preferences and Sector-Specifc Externalities," Working Papers 0801, Barnard College, Department of Economics.
  2. Xavier Raurich, 2001. "Indeterminancy and Government Spending in a Two-Sector Model of Endogenous Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 210-229, January.
  3. Jang-Ting Guo & Sharon G. Harrison, 2001. "Tax Policy and Stability in a Model with Sector-Specific Externalities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 75-89, January.
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  18. Chen, Shu-Hua & Guo, Jang-Ting, 2013. "Progressive taxation and macroeconomic (In) stability with productive government spending," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 951-963.
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  21. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  22. Jang-Ting Guo & Kevin J. Lansing, 1997. "Indeterminacy and stabilization policy," Working Paper 9708, Federal Reserve Bank of Cleveland.
  23. Nicolas L. Dromel & Patrick A. Pintus, 2008. "Are Progressive Income Taxes Stabilizing?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(3), pages 329-349, 06.
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  26. Harrison, Sharon G., 2001. "Indeterminacy in a model with sector-specific externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 747-764, May.
  27. Sharon G. Harrison, 2003. "Returns to Scale and Externalities in the Consumption and Investment Sectors," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 963-976, October.
  28. repec:hal:journl:halshs-00194395 is not listed on IDEAS
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