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The Effects of Government Spending: A Disaggregated Approach

  • Burgert, Matthias
  • Gomes, Pedro

We disaggregate government spending into five macroeconomic-relevant components: average wage, employment, purchases of intermediate goods and services, investment and transfers. We set up a simple RBC model with only search and matching frictions in the labour market to show that these components have different, quantitative and sometimes qualitative, effects on output, private wages and employment, the unemployment rate and private consumption. Using simulated data we show that a VAR with aggregate government spending and output does not identify any type of fiscal shock. We then use the several identification strategies proposed in the literature to understand the effects of different components, for the United States. We find that both the average wage and employment have larger multipliers than purchases of intermediate goods, investment and transfers. They also have distinct effects on private wages and private consumption.

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis with number 48690.

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Date of creation: 2011
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Handle: RePEc:zbw:vfsc11:48690
Contact details of provider: Web page: http://www.socialpolitik.org/
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  1. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers 20022, Trinity College Dublin, Department of Economics.
  2. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  3. Pedro Gomes, 2011. "Fiscal policy and the labour market: the effects of public sector employment and wages," European Economy - Economic Papers 439, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  4. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  5. Evi Pappa, 2009. "The Effects Of Fiscal Shocks On Employment And The Real Wage," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 217-244, 02.
  6. Perotti, Roberto, 1996. "Fiscal Consolidation in Europe: Composition Matters," American Economic Review, American Economic Association, vol. 86(2), pages 105-10, May.
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