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

49 Pages Posted: 23 Aug 2007

See all articles by Ivan Tchakarov

Ivan Tchakarov

International Monetary Fund (IMF) - Asia and Pacific Department

Roland Straub

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2007

Abstract

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.

Keywords: Working Paper, Public investment, Consumption, Government expenditures, Economic models, European Union

Suggested Citation

Tchakarov, Ivan and Straub, Roland, Assessing the Impact of a Change in the Composition of Public Spending: A DSGE Approach (July 2007). IMF Working Paper No. 07/168, Available at SSRN: https://ssrn.com/abstract=1007917

Ivan Tchakarov (Contact Author)

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Roland Straub

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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