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The Effects of Government Spending: A Disaggregated Approach

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  • Burgert, Matthias
  • Gomes, Pedro

Abstract

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.

Suggested Citation

  • Burgert, Matthias & Gomes, Pedro, 2011. "The Effects of Government Spending: A Disaggregated Approach," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48690, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc11:48690
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    References listed on IDEAS

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    1. Tenhofen, Jörn & Wolff, Guntram B., 2007. "Does anticipation of government spending matter? Evidence from an expectation augmented VAR," Discussion Paper Series 1: Economic Studies 2007,14, Deutsche Bundesbank.
    2. Gomes, Pedro Maia, 2010. "Fiscal Policy and the Labour Market: The Effects of Public Sector Employment and Wages," IZA Discussion Papers 5321, Institute of Labor Economics (IZA).
    3. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
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    5. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
    6. Perotti, Roberto, 1996. "Fiscal Consolidation in Europe: Composition Matters," American Economic Review, American Economic Association, vol. 86(2), pages 105-110, May.
    7. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 1-50.
    8. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
    9. 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, February.
    10. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
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    Cited by:

    1. Shadi Saraireh, 2020. "The Impact of Government Expenditures on Unemployment: A Case Study of Jordan," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 8(3), pages 189-203, September.
    2. Lu, Zhenkun & Kameda, Keigo, 2024. "Impact of fiscal policies on the labor market with search friction: An estimated DSGE model for Japan," Journal of the Japanese and International Economies, Elsevier, vol. 72(C).

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    More about this item

    Keywords

    Government spending;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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