The Structure of Government Spending and the Business Cycle

Daryna Grechyna

MPRA Paper from University Library of Munich, Germany

Abstract: We explore the role of the composition of government spending for the cyclical properties of fiscal variables and for the volatility of the business cycles. In the U.S., the fraction of mandatory spending in total government outlays increased from around 0.40 to 0.60 during the last 50 years, while the share of total government outlays in national output stayed relatively constant during this period. We distinguish mandatory and discretionary public spending in a standard model of optimal fiscal policy and show that the composition of government spending is able to explain a fraction of the reduction in output volatility during the Great Moderation and an increase in the countercyclicality of fiscal policy in the U.S. This is another argument in support of the "rules-based" fiscal policy rather than fiscal discretion.

Keywords: optimal fiscal policy; mandatory and discretionary public spending; volatility; business cycles. (search for similar items in EconPapers)
JEL-codes: E32 E62 H21 H41 (search for similar items in EconPapers)
Date: 2016-03
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:72029

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