Cyclical Effects of the Composition of Government Purchases

Jahangir Aziz and Luc Leruth

No 1997/019, IMF Working Papers from International Monetary Fund

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

Keywords: WP; aggregate demand; investment goods; steady state; crowding in; expenditure of the firm; equilibrium markup; elasticities of firm; investment demand; investment path; investment composite; share of investment; investment share; depreciation rate; Public investment spending; Consumption; Total factor productivity; Employment (search for similar items in EconPapers)
Pages: 38
Date: 1997-02-01
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Citations: View citations in EconPapers (1)

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