The effects of public spending externalities

Valerio Ercolani and João Valle e Azevedo

Journal of Economic Dynamics and Control, 2014, vol. 46, issue C, 173-199

Abstract: We conduct a positive analysis on the effects of ‘externalities’ produced by government spending. To this effect, we estimate, using U.S. data, an RBC model with two salient features. First, we allow government consumption to directly affect the marginal utility of consumption. Second, we allow public capital to shift the productivity of private factors. We provide an identification analysis that supports the strategy adopted for estimating the parameters governing these two channels. On one hand, private and government consumption are robustly estimated to be substitute goods. Because of substitutability, labor supply reacts little to a government consumption shock, so the estimated output multiplier is much lower than in models with separabilities. On the other hand, our results point towards public investment being ‘unproductive’.

Keywords: Public spending externalities; Fiscal multipliers; Government consumption; Government investment; DSGE models; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Related works:
Working Paper: The Effects of Public Spending Externalities (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:46:y:2014:i:c:p:173-199

DOI: 10.1016/j.jedc.2014.06.016

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