Cyclical Effects of the Composition of Government Purchases

February 1, 1997

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

This paper constructs a general equilibrium model with monopolistically competitive firms and endogenous markups where government spending consists of both consumption and investment goods. It is shown that when markups are countercyclical, increases in the share of investment goods in aggregate government expenditure entail a trade-off between greater long- run efficiency and higher short-run volatility. Estimates based on the model, calibrated to the postwar U.S. economy, show that the effects on output, employment, and welfare can be significant

Subject: Consumption, Employment, Expenditure, Labor, National accounts, Production, Public investment spending, Total factor productivity

Keywords: aggregate demand, Consumption, crowding in, depreciation rate, elasticities of firm, Employment, equilibrium markup, expenditure of the firm, investment composite, investment demand, investment goods, investment path, investment share, Public investment spending, share of investment, steady state, Total factor productivity, WP

Pages:
38
Volume:
1997
DOI:
https://doi.org/10.5089/9781451843712.001
Issue:
019
Series:
Working Paper No. 1997/019
Stock No:
WPIEA0191997
ISBN:
9781451843712
ISSN:
1018-5941

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