Government Spending, Consumption, and the Extensive Investment Margin

44 Pages Posted: 8 May 2013

See all articles by Vivien Lewis

Vivien Lewis

Technical University of Dortmund

Roland Winkler

Dortmund University, Faculty of Business, Economics, and Social Sciences,

Date Written: April 30, 2013

Abstract

We find VAR evidence that a rise in US government spending boosts consumption and firm entry. The joint dynamics observed in the data poses a puzzle for business cycle models with endogenous entry (extensive-margin investment). Persistent spending expansions generate entry but crowd out consumption through a negative wealth effect.

Model features that dampen the wealth effect, such as credit-constrained consumers or non-separable preferences, reduce entry. This leads to weaker competition in oligopolistic markets, such that markups rise and consumption falls. The model captures the joint dynamics if labor supply is very elastic or public and private consumption are complements.

Keywords: entry, extensive investment margin, consumption, crowding-out, government spending

JEL Classification: E21, E32, E62

Suggested Citation

Lewis, Vivien and Winkler, Roland, Government Spending, Consumption, and the Extensive Investment Margin (April 30, 2013). Available at SSRN: https://ssrn.com/abstract=2261648 or http://dx.doi.org/10.2139/ssrn.2261648

Vivien Lewis (Contact Author)

Technical University of Dortmund ( email )

Emil-Figge-Stra├če 50
Dortmund, 44227
Germany

Roland Winkler

Dortmund University, Faculty of Business, Economics, and Social Sciences, ( email )

United States

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