## The International Effects of Government Spending Composition

_IMF Working Papers, January 1, 2005_

## Source details

**Canonical URL:** [The International Effects of Government Spending Composition](https://www.imf.org/en/publications/wp/issues/2016/12/31/the-international-effects-of-government-spending-composition-17944)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/the-international-effects-of-government-spending-composition-17944/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/31/the-international-effects-of-government-spending-composition-17944/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/31/the-international-effects-of-government-spending-composition-17944/bundle-manifest.json)

## Bibliographic details
- Authors: Giovanni Ganelli
- Published: January 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451860238.001

---

### Summary and research question
- Resolves a paradox noted by Alesina and Perotti (1995): government employment is an important component of public spending, yet fiscal-policy debates concentrate on shocks to non-wage government consumption.
- Incorporates the distinction between spending for government employment and spending for non-wage government consumption in a "new open economy macroeconomics" model.
- Main research focus: how changes in public employment versus non-wage government consumption affect relative private consumption and the exchange rate across countries.

### Methodology
- Framework: "new open economy macroeconomics" model that separates public wage (government employment) spending from non-wage government consumption.
- Comparative scenarios examined: permanent reductions in public employment matched by either (a) reductions in taxes, or (b) financing increased non-wage government consumption.

### Key findings
- A permanent reduction in public employment in one country, when matched by a reduction in taxes:
  - Reduces relative private consumption.
  - Appreciates the domestic exchange rate.
- When the reduction in public employment is used to finance increased non-wage government consumption:
  - The macroeconomic effects are ambiguous.
  - Outcomes are affected by the initial level of the public wage bill.

### Policy implications
- Composition of government spending (public employment vs. non-wage consumption) matters for international spillovers and domestic macroeconomic outcomes.
- Fiscal adjustments that change the mix between wage and non-wage components can have contrasting effects depending on whether they accompany tax changes or reallocation to consumption.
- Policymakers should consider the initial level of the public wage bill when evaluating the international macroeconomic consequences of reallocating public spending.

---

## Content in this bundle

- **_wp0504**
  - [_wp0504 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp0504.pdf.md){rel="alternate" type="text/markdown"}
  - [_wp0504 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp0504.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-international-effects-of-government-spending-composition-17944_