Cyclical Effects of the Composition of Government Purchases
38 Pages Posted: 15 Feb 2006
Date Written: February 1997
Abstract
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
JEL Classification: D43, D58, E32, H50
Suggested Citation: Suggested Citation
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