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Sectoral Composition of Government Spending and Macroeconomic (In)stability

Author

Listed:
  • 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)

Abstract

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 aÌ uctuations. When each type of government spending is postulated as a constant proportion of the economyiÌ s total output, we find that there exists a trade-o§ between public consumption versus investment expenditures to yield saddle-path stability and equilibrium uniqueness.

Suggested Citation

  • Jang-Ting Guo & Juin-Jen Chang & Jhy-Yuan Shieh & Wei-Neng Wang, 2013. "Sectoral Composition of Government Spending and Macroeconomic (In)stability," Working Papers 201305, University of California at Riverside, Department of Economics, revised Sep 2013.
  • Handle: RePEc:ucr:wpaper:201305
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    References listed on IDEAS

    as
    1. Guo, Jang-Ting & Harrison, Sharon G., 2010. "Indeterminacy with no-income-effect preferences and sector-specific externalities," Journal of Economic Theory, Elsevier, vol. 145(1), pages 287-300, January.
    2. Gokan, Yoichi, 2006. "Dynamic effects of government expenditure in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 127(1), pages 323-333, March.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Government Spending; Equilibrium (In)determinacy; Business Cycles;

    JEL classification:

    • 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
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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