Assessing the Impact of a Change in the Composition of Public Spending: A DSGE Approach

July 1, 2007

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Ivan Tchakarov, and Roland Straub. Assessing the Impact of a Change in the Composition of Public Spending: A DSGE Approach, (USA: International Monetary Fund, 2007) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Despite intense calls for safeguarding public investment in Europe, public investment expenditure, when measured in relation to GDP, has steadily fallen in the last three decades, evoking fears that economic activity may be correspondingly negatively affected. At the same time, however, public consumption in the EU-12 countries has trended up. In this paper, we provide a macroeconomic assessment of the observed change in the composition of public spending in the euro area in a medium-scale two-country dynamic stochastic general equilibrium (DSGE) model. First, we identify the channels through which both temporary and permanent public investment shocks generate larger fiscal multipliers than exogenous increases in public consumption. Second, we quantify the negative impact of a change in fiscal stance, characterized by a permanent rise in public consumption and a permanent fall in public investment, keeping the overall level of public spending constant. The key message of the paper is that calls for reversing the observed trend in the composition of public spending are well justified.

Subject: Consumption, Expenditure, Private investment, Public investment and public-private partnerships (PPP), Public investment spending

Keywords: Aggregate demand, Public spending, WP

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/168
Stock No:

WPIEA2007168
ISBN:

9781451867329
ISSN:

1018-5941

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