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Government Consumption and Investment: Does the Composition of Purchases Affect the Multiplier?

Christoph Boehm ()

No 662, Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: I show that a large and conventional class of macroeconomic models predicts that short-lived government investment shocks have a much smaller fiscal multiplier than government consumption shocks. I test this prediction in a panel of OECD countries using real-time forecasts of government consumption and investment to purify changes in purchases of their predicted components. Consistent with theory, I estimate a government investment multiplier near zero and a government consumption multiplier of approximately 0.8. These findings suggest that fiscal stimulus packages which contain large government investment components may not be as effective at stimulating aggregate demand as commonly thought.

Keywords: Fiscal multiplier; Durable goods; Investment; Government spending; Government investment; Government consumption (search for similar items in EconPapers)
JEL-codes: E21 E32 E62 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pke
Date: 2018-05-07
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