persistent government spending and fiscal multipliers the investment channel this paper inspects the mechanism shaping government spending multipliers in various smallscale dsge setups with endogenous labor supply and capital accumulation we analytically characterize the short run investment multiplier which in equilibrium can be either positive or negative the investment multiplier increases with the persistence of the exogenous government spending process the response of investment to government spending shocks strongly affects short run multipliers on output and consumption

increasing returns capital utilization and the effects of government spending abstract we show that a one sector real business cycle model with mild increasing returns to scale variable capital utilization and saddle path stability is able to produce qualitatively realistic business cycles driven solely by disturbances to government purchases due to an endogenous increase in labor productivity a positive spending shock can lead to simultaneous increases in output consumption investment employment and real wage our analysis illustrates a close relationship between this result and the recent literature that explores indeterminacy and sunspots in real business cycle models under laissez faire in particular the condition which governs the required magnitude of increasing returns for government spending shocks to generate procyclical macroeconomic effects is identical to that necessary for a laissez faire one sector real business cycle model to exhibit local indeterminacy

charter value risk taking incentives and emerging competition for fannie mae and freddie mac this paper examines two forces that may soon increase competition in the u s secondary conforming mortgage market 1 the federal home loan bank mortgage purchase programs and 2 the adoption of revised risk based capital requirements for large u s banks basel ii we argue that this competition is likely to reduce the growth and relative importance of fannie mae and freddie mac and hence reduce their charter values and effective capital such developments could in turn lead to more risky behaviors by these two companies this last consequence warrants greater supervisory awareness and legal authorities

tax base and crowding in effects of balanced budget fiscal policy a dynamic general equilibrium business cycle model is constructed with staggered price adjustment monopolistic wage setting and distortionary taxation the government purchases goods runs an unemployment benefit system and balances its budget through a proportional tax on labour income a temporary tax financed increase in government expenditures can lower the tax rate through a demand induced widening of the tax base it is shown analytically that this allows private consumption to rise under realistic conditions despite the negative wealth effect of increased fiscal spending

determinants of the current account balance in the united states this article studies the role of public and private imbalances in the behaviour of the current account balance in the united states in the context of an intertemporal model the estimation evaluates the effects of public and private imbalances on the dynamics of the current account correlation coefficients support the ricardian equivalence higher budget deficit correlates with a reduction in private consumption and an increase in private savings government saving does not vary significantly with macroeconomic variables in the short or in the long run in contrast fluctuations in government investment vary significantly with a number of economic variables in the long and in the short run accordingly fluctuations in the budget deficit are likely to be driven by fluctuations in public investment in contrast to government savings private savings vary significantly with macro variables in the long and in the short run fluctuations in private investment appear less evident compared to that in privat

how misleading is linearization evaluating the dynamics of the neoclassical growth model this paper investigates the reliability of employing linearization to evaluate the dynamic adjustments to changes in productive government spending in a ramsey growth model if government expenditure is introduced as a flow and the dynamic adjustment is fast linearization may yield a reasonably good approximation to the true dynamics even for fairly large policy shocks if government expenditure assumes the form of a stock leading to more sluggish adjustment linearization may yield misleading predictions these errors occur at the beginning of the transition and weigh heavily in welfare calculations the implications for temporary shocks and the speed of convergence are also considered

international interdependencies in fiscal stabilization policies abstract trade links imply that business cycle fluctuations are transmitted among trade partners to the extent that fiscal policy can mitigate business cycle fluctuations international interdependencies in stabilization policies arise we analyse in a two country general equilibrium model the role of fiscal policy in mitigating risk or providing implicit insurance in the presence of capital market imperfections and adjustment failures rigid wages it is shown that there is a welfare case for an active stabilization policy and that it is larger in the presence of adjustment failures rigid wages non cooperative policy decisions imply inefficiencies in fiscal stabilization policies which in the case of flexible wages may imply too much stabilization whereas stabilization is always insufficient in the case of rigid wages

why does private consumption rise after a government spending shock recent empirical evidence suggests that private consumption is crowded in by government spending this outcome violates existing macroeconomic theory according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption

productivity shocks budget deficits and the current account abstract productivity shocks and budget deficits are considered to be two key determinants of the current account in order to assess formally the role of both factors in driving current account movements the present paper extends the standard intertemporal model of the current account to allow for non ricardian household behavior testable cross equation restrictions for the current account and investment are derived by drawing on the distinction between country specific and global innovations to productivity as well as to the government budget we test the restrictions of the model against time series data for 21 oecd countries and find evidence in support of the model

fiscal policy in an unemployment crisis this paper shows that large scal multipliers arise naturally from equilibrium unemployment dynamics in response to a shock that brings the economy into a liquidity trap an expansion in government spending increases output and causes a fall in the unemployment rate since movements in unemployment are persistent the eects of current spending linger into the future leading to an enduring rise in income as an enduring rise in income boosts private demand even a temporary increase in government spending sets in motion a virtuous employment spending spiral with a large associated multiplier this transmission mechanism contrasts with the conventional view in which scal policy may be ecacious only under a prolonged and committed rise in government spending which engineers a spiral of increasing ination

infrastructure provision and macroeconomic performance this paper studies the differences between private and government provision of infrastructure capital utilization decisions and their differential role in determining market prices for capital goods under the two regimes of infrastructure provision serve as a critical transmission mechanism for fiscal policy a subsidy to private providers of infrastructure is preferable to direct government provision irrespective of how the subsidy or expenditure is financed the case for private provision is much stronger in economies characterized by high levels of congestion the choice between private and government provision also has a crucial effect on the design of optimal fiscal policy 2011 elsevier b v all rights reserved

excludable and non excludable public inputs consequences for economic growth non excludable and excludable public inputs are introduced into an endogenous growth model we derive the equilibrium growth rate and design the optimal tax and user cost structure emphasizing the role of congestion and its consequences for the government s budget the latter comprises fee and tax revenues that are used to finance the public inputs although they may generate insufficient revenue to do so entirely we extend the model to allow for monopoly pricing of the user fee by the government most of the analysis is conducted for general production functions consistent with endogenous growth but the ces technology is also considered a vast literature has evolved emphasizing the role of public investment as a determinant of economic growth among the earliest contributions arrow and kurz 1970 is particularly significant while the seminal work of barro 1990 has been especially influential with respect to the contemporary endogenous growth literature stimulated by aschauer s 1989 findings pertaining to the high rate of return on public capital several authors have explored various aspects of the role of public capital in stimulating economic growth for example baxter and king 1993 and fisher and turnovsky 1998 examine the interaction between public and private capital in a ramsey type growth model while futagami et al 1993 perform a similar type of analysis in an endogenous growth context glomm and ravikumar 1997 analyse the growth effects of productive public spending in an overlapping generations setup extending the framework to include majority voting and alternative compositions of publicly provided goods and services they also indicate private alternatives to public provision but do not pursue this in detail cassou and lansing 1998 focus on the relationship between private and public capital showing how the evolution of the ratio between the two in the us economy since 1925 is broadly consistent with the predictions of a simple ramsey growth model they also show how the productivity slowdown in the us economy since the 1970s is more likely due to increasing tax rates than to non optimal public investment policy much of the literature including barro treats the public input as a pure public good freely available without restrictions or impediments to all agents in the economy but the public goods literature identifies many different characteristics that most public goods in fact exhibit notably the presence of rivalry and or excludability see e g cornes and sandler 1996 thus the treatment of a public

intersectoral labor mobility and the growth of the service sector one of the most striking changes in the u s economy over the past 50 years has been the growth in the service sector between 1950 and 2000 service sector employment grew from 57 to 75 percent of total employment however over this time the real hourly wage in the service sector grew only slightly faster than in the goods sector in this paper we assess whether or not the essential constancy of the relative wage implies that individuals face small costs of switching sectors and we quantify the relative importance of labor supply and demand factors in the growth of the service sector we specify and estimate a two sector labor market equilibrium model that allows us to address these empirical issues in a unified framework our estimates imply that there are large mobility costs output in both sectors would have been double their current levels if these mobility costs had been zero in addition we find that demand side factors that is technological change and movements in product and capital prices were responsible for the growth of the service sector

fiscal shocks and their consequences this paper investigates the response of hours worked and real wages to fiscal policy shocks in the post world war ii us we identify these shocks with exogenous changes in military purchases and argue that they lead to a persistent increase in government purchases and tax rates on capital and labor income and a persistent rise in aggregate hours worked as well as declines in real wages the shocks are also associated with short lived rises in aggregate investment and small movements in private consumption we describe and implement a methodology for assessing whether standard neoclassical models can account for the consequences of a fiscal policy shock simple versions of the neoclassical model can account for the qualitative effects of a fiscal shock once we allow for habit formation and investment adjustment costs the model can also account reasonably well for the quantitative effects of a fiscal shock

fiscal policy and asset prices with incomplete markets we study the simultaneous impact of fiscal policy decisions on macroeconomic activity wealth distribution and asset prices we consider a general equilibrium overlapping generations model with incomplete markets and heterogeneous agents where government debt and capital are imperfect substitutes increases in public debt lead to significant increases in the riskless rate and to a reduction in the equity premium while higher capital income tax rates lead to a higher equity premium the crowding out effects on capital and output are much higher than in models where government debt and capital are perfect substitutes which thus ignore households portfolio reallocation decisions the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

government spending entry and the consumption crowding in puzzle this article documents empirically that net firm entry robustly rises after a u s government spending expansion we use this new finding to test the empirical validity of various model features that have been proposed to generate consumption crowding in after positive expenditure shocks endogenous entry models typically fail to generate the observed joint increase in consumption and entry model features that dampen the wealth effect such as rule of thumb households or complementarity between labor and consumption in preferences tend to reduce entry we show that utility or productivity enhancing public spending can reconcile the model with our documented fact and performs well empirically

new keynesian versus old keynesian government spending multipliers renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy because of modelling uncertainty it is essential that policy evaluations be robust to alternative assumptions we find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust government spending multipliers in an alternative empirically estimated and widely cited new keynesian model are much smaller than in these old keynesian models the estimated stimulus is extremely small with gdp and employment effects only one sixth as large and with private sector employment impacts likely to be even smaller we investigate the sensitivity of our findings with regard to the response of monetary policy the zero bound on nominal interest rates and the inclusion of an empirically relevant degree of rule of thumb behaviour in the new keynesian model in addition we relate our findings using estimated structural macroeconomic models to the recent literature using reduced form regression techniques

fiscal policy pricing frictions and monetary accommodation this paper empirically investigates whether the theoretical conditions for government expenditure expansions to be effective hold for the data we ask whether the necessary conditions for fiscal effectiveness are relevant on average and in special circumstances that capture features of the recent crisis fiscal policy can be an effective countercyclical tool if monetary policy accommodates the fiscal expansion if expectations about future output growth and inflation are constant and if structural relationships are invariant to the policy change recent expansions are unlikely to produce large output multipliers or have important debt or inflation effects credible deficit and debt reduction schemes can produce sizeable output multipliers fabio canova and evi pappa

the international ramifications of tax reforms supply side economics in a global economy this paper studies tax reforms in a dynamic model of a global economy calibrated to current u s and european tax policies world capital markets add consumption smoothing and income redistribution effects that alter closed economy predictions in the absence of taxes on foreign interest welfare gains of eliminating u s income taxes are enlarged by up to 34 percent at the expense of european losses caused by transitional declines in consumption and leisure and a permanent capital outflow in contrast if foreign interest is taxed the same tax reform reduces u s welfare 0 7 percent and increases european welfare 1 8 percent copyright 1998 by american economic association

public capital in the 21st century as productive as ever abstractthe global financial crisis and the euro area sovereign debt crisis that followed induced a rapid deterioration in the fiscal positions of countries across the globe in the ensuing fiscal

downward nominal wage rigidity and the case for temporary infl ation in the eurozone abstract since the onset of the great recession in peripheral europe nominal hourly wages have not fallen from the high levels they had reached during the boom years this in spite of widespread in

endogenous markups and the effects of income taxation theory and evidence from oecd countries abstract existing studies on the effects of fiscal policy under imperfect competition typically treat each firm s price cost markup as fixed this paper examines the implications of endogenising the markup in a simple model of income taxation under monopolistic competition it is demonstrated that an increase in income tax reduces the number of firms lessens competition among surviving firms and raises the optimal markups in the new steady state through this channel the effects of income taxation on the key macroeconomic variables as well as on consumer welfare are unambiguously enlarged the simple model prediction is largely supported by cross section regressions with data from oecd countries

imperfect mobility of labor across sectors a reappraisal of the balassa samuelson effect this paper investigates the relative price and relative wage effects of a higher productivity in the traded sector compared with the non traded sector in a two sector open economy model with imperfect substitutability in hours worked across sectors the balassa samuelson 1964 model predicts that a rise in the sectoral productivity ratio by 1 raises the relative price of non tradables by 1 while leaving the non traded wage traded wage ratio unchanged applying cointegration methods to a panel of fourteen oecd countries over the period 1970 2007 our estimates show that the relative price rises by only 0 78 and the relative wage falls by 0 27 while our first set of empirical findings cast doubt on the quantitative predictions of the balassa samuelson model our second set of evidence highlights the role of imperfect labor mobility the relative price responds more to a productivity differential between tradables and non tradables while the reaction of the relative wage is more muted in countries with higher intersectoral reallocation of labor we show that the ability of the two sector model to account for our evidence quantitatively relies upon two ingredients i imperfect mobility of labor across sectors and ii physical capital accumulation finally our numerical results reveal that the model predicts the relative price response fairly well and to a lesser extent the relative wage response

international evidence on tradables and nontradables inflation abstract using 1970 1985 sectoral data for the oecd we find that inflation in nontradable goods exceeds inflation in tradables we identify a demand shift towards nontradables and faster growth of total factor productivity in the tradable goods sector as the prime causes of the differential inflation in addition disinflation attempts and the exchange rate regime appear to have exerted significant influence on the relative inflation rate

can fiscal spending stimulate private consumption abstract empirically government expenditure shocks seem to crowd in private consumption while neoclassical and new keynesian models predict crowding out we derive conditions under which a government in utility specification in a sticky price model helps to reconcile theory and evidence

monetary fiscal policy interactions and fiscal stimulus abstract increases in government spending trigger substitution effects both inter and intra temporal and a wealth effect the ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption higher future taxes create a strong negative wealth effect while the active monetary response increases the real interest rate this paper estimates markov switching policy rules for the united states and finds that monetary and fiscal policies fluctuate between active and passive behavior when the estimated joint policy process is imposed on a conventional new keynesian model government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized the paper reports the model s predictions of the macroeconomic impacts of the american recovery and reinvestment act s implied path for government spending under alternative monetary fiscal policy combinations

two moment decision models and expected utility maximization two moment decision models are consistent with expected utility maximization only if the choice set or the agent s preferences are restricted this paper identifies a restriction which is sufficient to ensure this consistency and confirms that it holds in many economic models the implications for economic analysis are then derived two different approaches to representing an agent s preferences over strategies yielding random payoffs are in wide use under the mean standard deviation ms approach the agent is assumed to rank the alternatives according to the value of some function defined over the first two moments of the random payoff while the expected utility eu criterion assumes that the expected value of some utility function defined over payoffs is used instead the fact that there are these two competing approaches has generated a considerable literature some authors are concerned with the advantages and disadvantages of each while others deal with conditions under which the potentially different approaches would yield the same results or at least approximately so space does not

a mapping of labor mobility costs in the developing world abstract estimates of labor mobility costs are needed to assess the responses of employment and wages to trade shocks when factor adjustment is costly available methods to estimate those costs rely on panel data which are seldom available in developing countries we propose a method to estimate mobility costs using readily obtainable data worldwide our estimator matches the changes in observed sectoral employment allocations with the predicted allocations from a model of costly labor adjustment we estimate a world map of labor mobility costs and we use those estimates to explore the response of labor markets to trade policy

implications of productive government spending for fiscal policy abstract the standard assumption in macroeconomics that government spending is unproductive can have substantive implications for tax and spending policy productive government spending introduces a positive feedback between the tax rate the productive capacity of the economy and tax revenue we allow marginal tax revenue to be optimally allocated between productive subsidies to human capital and utility enhancing government consumption and calculate laffer curves for the us productive government spending yields higher revenue maximizing tax rates steeper slopes at low tax rates and higher peaks the differences are particularly pronounced for the labor tax laffer curve the use of tax revenue is an important determinant of the actual revenue that a tax rate increase generates

default risk sectoral reallocation and persistent recessions abstract sovereign debt crises are associated with large and persistent declines in economic activity disproportionately so for nontradable sectors this paper documents this pattern using spanish data and builds a two sector dynamic quantitative model of sovereign default with capital accumulation recessions are very persistent in the model and more pronounced for nontraded sectors because of default risk an adverse domestic shock increases the likelihood of default limits capital inflows and thus restricts the ability of the economy to exploit investment opportunities the economy responds by reducing investment and reallocating capital toward the traded sector to support debt service payments the real exchange rate depreciates a reflection of the scarcity of traded goods we find that these mechanisms are quantitatively important for rationalizing the experience of spain during the recent debt crisis

can government purchases stimulate the economy this essay briefly reviews the state of knowledge about the government spending multiplier drawing on theoretical work aggregate empirical estimates from the united states as well as cross locality estimates i assess the likely range of multiplier values for the experiment most relevant to the stimulus package debate a temporary deficit financed increase in government purchases i conclude that the multiplier for this type of spending is probably between 0 8 and 1 5 jel e23 e62 h50

anticipated fiscal policy and adaptive learning abstract the impact of anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations is considered agents are assumed to combine limited structural knowledge with a standard adaptive learning rule these issues are analyzed using two well known set ups an endowment economy and the ramsey model in our scenario there are important deviations from both rational expectations and purely adaptive learning the approach could be applied to other frameworks

banking market structure and financial stability evidence from the texas real estate crisis in the 1980s abstract this paper examines the relationship between banking market structure and financial stability using data on thrifts a type of banking institution specializing in residential mortgage lending i test two related hypotheses first competition reduces franchise value second reduced franchise value induces risk taking testing the second hypothesis exploits predictions that when hit by an exogenous shock the slope of risk with respect to franchise value becomes more negative because thrifts adopt bang bang strategies and choose minimal or maximal risk using the texas real estate collapse in the 1980s as a natural experiment i find evidence supporting both hypotheses

laffer strikes again dynamic scoring of capital taxes abstract we set up a neoclassical growth model extended by a corporate sector an investment and finance decision of firms and a set of taxes on capital income we provide analytical dynamic scoring of taxes on corporate income dividends capital gains other private capital income and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium we then calibrate the model for the us and explore quantitatively the revenue effects from capital taxation we take adjustment dynamics after a tax change explicitly into account and compare with steady state effects we find among other results a self financing degree of corporate tax cuts of about 70 90 and a very flat laffer curve for all capital taxes as well as for tax depreciation allowances results are strongest for the tax on capital gains the model predicts for the us that total tax revenue increases by about 0 3 1 2 after abolishment of the tax

habit formation adjustment costs and international transmission of fiscal policy abstract the paper studies the effects of fiscal policy in an integrated world economy the setup is one with habit forming endogenous rates of time preference and adjustment costs in investment most of the predictions of the model are in line with the recent empirical literature on fiscal policy for instance in response to a balanced fiscal expansion we obtain positive long run output multipliers long run increases in employment short and medium run increases in wages and decreases in investment our results suggest that short run government spending multipliers are smaller than tax multipliers most importantly we show that the model can generate positive short and medium run consumption responses to a positive fiscal shock this is relevant as negative consumption responses are considered to be one of the main challenges facing neo classical models of fiscal policy

externality in labor supply and government spending standard business cycle models face difficulties generating i government spending multipliers exceeding unity and ii stabilizing effects of government size using a simple model with externality in labor supply we show that a sufficient degree of complementarity between aggregate and private labor supplies is key to reproducing these stylized facts

rising occupational and industry mobility in the united states 1968 97 we document and analyze the high level and the substantial increase in worker mobility in the united states over the 1968 97 period at various levels of occupational and industry aggregation this is important in light of the recent findings that human capital of workers is largely occupation or industry specific to control for measurement error in occupation and industry coding we develop a method that utilizes the psid retrospective occupation industry supplemental data files we emphasize the importance of our findings for understanding a number of issues such as the changes in wage inequality aggregate productivity job stability and life cycle earnings profiles

sectoral shocks and aggregate fluctuations abstract this paper presents a multisector dynamic general equilibrium model of business cycles with a distinctive feature aggregate fluctuations are driven by independent sectoral shocks the model hypothesizes that trade among sectors provides a strong synchronization mechanism for these shocks due to the limited but locally intense interaction that is characteristic of such input trade flows limited interaction characterized by a sparse intermediate input use matrix reduces substitution possibilities among intermediate inputs which strengthens comovement in sectoral value added and leads to a postponement of the law of large numbers in the variance of aggregate value added the chief virtue of this model is that reliance on implausible aggregate shocks is not necessary to capture the qualitative features of macroeconomic fluctuations building on horvath 1998 review of economic dynamics 1 781 808 which establishes the theoretical foundation for the relevance of limited interaction in the context of a stylized multisector model this paper specifies a more general multisector model calibrated to the us 2 digit standard industrial code economy simulations prove the model is able to match empirical reality as closely as standard one sector business cycle models without relying on aggregate shocks

real government size automatic feedback rules and the measured effectiveness of fiscal policy this paper argues that as intervention fiscal policy means more than simply any change in government spending and this requires of fiscal analysis a measure that separates the allocative from the counter cyclical activities of government defining intervention as an optimal policy rule that responds automatically to privately unanticipated variations in output a general equilibrium model is built to separate the supply side effects of desired changes in the size of government from demand side interventions designed to stimulate aggregate demand the model is tested using the results of a public choice investigation of the real size of government ferris and west 1996 that exercise produces a measure of desired size and through its residual an implicit measure of intervention the paper tests the prediction that increases in desired size increase aggregate supply and that ex post measures of fiscal intervention can be recovered and tested for their effect on aggregate output the test uses citibase

business cycles with distorting taxes and disaggregated capital markets abstract this paper studies a neoclassical growth model to examine the linkages between distorting corporate and personal taxes and cyclical movements of aggregates such as investments in equipment and structures suppose tax variables vary stochastically and annually we solve quarterly individual and aggregate decision rules by recursive methods and quantify the dynamic impacts on aggregates from unit changes in tax structures and individual and joint tax specifications the findings suggest that corporate income tax is the major factor leading to substantial tax effects on business cycles moreover the impact of investment tax credit for equipment on disaggregated investments is equally significant

the dominant borrower syndrome abstractthe financing channel of a fiscal stimulus matters for the size and the sign of the fiscal multiplier we develop a general equilibrium model where a fiscal stimulus is partially bank funded and the government becomes the dominant borrower from banks relative to entrepreneurs this leads to a negative impact on credit spreads investment and a contraction in output we support our story with a structural vector autoregression for a sample of developing countries featuring the dominant borrower syndrome

liquidity constraints and the substitutability between private and government consumption the role of military and non military spending i introduction using data for a number of economies we investigate i the relationship between private consumption and two types of government spending military and non military and ii the severity of liquidity constraints because of their importance for macroeconomic modeling in theory and practice 1 both issues have been the subjects of considerable theoretical and empirical investigation on the issue of liquidity constraints the most influential research has relied on hall s 1978 euler equation approach to the permanent income hypothesis in an attempt to reconcile hall s and flavin s 1981 methodologies hayashi 1982 modified hall s martingale result to allow for the possibility that a subset of consumers are liquidity constrained and showed that liquidity constraints can result in consumption s excess sensitivity to current income campbell and mankiw 1989 1990 1991 and jappelli and pagano 1989 have applied hayashi s methodology using data from the u s and several other oecd countries on the substitutability issue aschauer 1985 has modified hall s euler equation to allow for substitutability between government spending and private consumption and found that the two are substitutes for the u s karras 1994 however using a similar approach and data for 30 countries concludes that private and government consumption are better described as complementary or unrelated liquidity constraints and substitutability have been combined in studies by graham and himarios 1991 cushing 1992 and graham 1993 using u s data and by evans and karras 1996 for a number of countries a crucial limitation of most of these studies is the use of aggregate government consumption data which counterintuitively imposes a common substitutability parameter on all components of government spending 2 using recently available time series data for a large number of countries the present paper relaxes this restriction by decomposing government consumption into military and non military components enabling us to separately identify their relationship to private consumption the allocation of government consumption between military and non military functions has varied greatly across countries the appendix reports the average size of military and non military government shares in gdp as well as the military non military ratio by country over the 1970 1989 period average military expenditure as a fraction of gdp for example has ranged in our sample from 0 11 in mexico to 12 30 in jordan similarly the fraction of government consumption absorbed by military expenditure has ranged from 1 09 in mauritius to 66 82 in poland this sizable variability is promising in terms of cross sectional identification power but it also suggests that the estimated parameters must not be assumed to be common across countries the estimated model is derived in section ii which combines liquidity constraints and substitutability by nesting the approaches of hayashi 1982 and aschauer 1985 in the same section we discuss data sources and the estimation strategy which permits the estimated parameters to vary by country in a way that helps determine how they are influenced by country specific factors section iii estimates the model for a panel of the 66 countries for which annual data on all series are available for the 1970 1989 period the paper s main conclusions are given in section iv ii methodology and data we assume that consumers in economy i at time t derive utility from effective consumption c sup which we define as 1 mathematical expression omitted where c is private consumption g sup m and g sup nm are the military and non military components of government consumption the parameters theta sup m and theta sup nm measure the degree of substitutability between c and g sup m and c and g sup nm respectively

aggregate infrastructure capital stock and long run growth evidence from finnish data abstract in this paper bayesian methods and the finnish aggregate infrastructure capital series from 1860 to 2003 are used to explore how government infrastructure policy affects long run output growth we use finnish data since to the best of our knowledge the finnish land and water construction investments series is the best available sufficiently long time series on aggregate infrastructure investments the finnish data provide strong and robust evidence indicating that permanent changes in government infrastructure policy have permanent effects on the growth rate of output

deregulation and bank financial policy the standard view that banks can value maximize by exploiting non risk rated deposit insurance ignores the potential loss of a valuable bank charter due to insolvency recognition of this effect changes the bank s optimal financial policy and can induce extreme risk averting as well as risk taking behavior however as the value of the bank charter falls the risk taking strategy is more apt to dominate therefore current deregulation of the banking industry by easing entry and devaluing charters holds the potential for increases in the incidence of insolvency unless offsetting policies are instituted

on the long run neutrality of demand shocks we revisit the seminal paper by blanchard and quah 1989 and investigate their long run identification scheme we use a structural var model with smoothly changing covariances for the identification of shocks formal testing rejects the long run neutrality of demand shocks

the effects of government purchases shocks review and estimates for the eu in this article we review the theoretical consequences of government purchases shocks for both closed and open economies followed by a discussion of the empirical literature next we provide our own estimates for the eu countries we find that an increase in government purchases raises output consumption and investment and reduces the trade balance however the stimulating effect is weaker and the trade balance reduction is larger for the more open eu economies consistent with larger leakage effects further we show that government purchases shocks in large eu economies have non negligible consequences for economic activity in the main trading partners

fiscal policy in general equilibrium this paper studies four classic fiscal policy experiments within a quantitatively restricted neoclassical model the authors main findings are as follows 1 permanent changes in government purchases can lead to short run and long run output multipliers that exceed one 2 permanent changes in government purchases induce larger effects than temporary changes 3 the financing decision is quantitatively more important than the resource cost of changes in government purchases and 4 public investment has dramatic effects on private output and investment these findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy copyright 1993 by american economic association

indeterminacy and fiscal policies in a growing economy this paper studies the dynamic properties of a standard one sector model of endogenous growth with inelastic labor supply in which capital taxes are used to nance public production and consumption services the government is benevolent and chooses its tax policy by taking into account the decentralized competitive equilibrium within this second best setup we establish conditions for multiple balanced growth paths in conjunction with indeterminacy of transitional dynamics the mechanism for global and local indeterminacy is a simple combination of public production services that provide production externalities to private rms and hence cause a wedge between private and social returns public consumption services that provide direct utility to households and endogenously chosen distorting taxes

risk based capital requirements for mortgage loans abstract we contribute to the debate over the reform of the basel accord by developing risk based capital requirements for mortgage loans held in portfolio by financial intermediaries our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions results indicate that appropriate capital charges for credit risk vary substantially with loan characteristics and portfolio geographic diversification hence rules that offer little risk differentiation including the current basel i regime and standardized approach proposed in basel ii result in significant divergence between regulatory and economic capital these results highlight the incentive problems inherent in simplified methods of capital regulation

habit formation and fiscal transmission in open economies in this paper we analyze the ability of an open economy version of the neoclassical model to account for the time series evidence on fiscal policy transmission revisiting the evidence we find that i government spending raises output while inducing a simultaneous decline of investment and the current account and ii the responses of output and investment are more muted in more open economies while current account deficits tend to be larger turning to the model we explore the role of habit formation for fiscal policy transmission specifically we show that the model can account for the evidence if consumption behavior is characterized by habit formation and the terms of trade adjust endogenously

distortionary taxes and public investment when government promises are not enforceable abstract we characterize the optimal financing of productive public capital and compute the welfare loss from being unable to commit to the ramsey policy because this calculation ultimately relies on numerical approximations we contrast alternative approaches while perturbation and linear quadratic methods deliver accurate steady states the latter can yield misleading policy implications during transitions we find that moving from a regime with commitment to one with discretion implies only a small welfare loss although markov perfect consumption falls noticeably short of its ramsey counterpart in steady state consumption under discretion is higher in the short run which largely offsets this long run loss

fiscal policy and occupational employment dynamics we document substantial heterogeneity in occupational employment dynamics in response to government spending shocks in the united states employment rises most strongly in service sales and office pink collar occupations by contrast employment in blue collar occupations is hardly affected by fiscal policy we provide evidence that occupation specific changes in labor demand are key for understanding these findings we develop a business cycle model that explains the heterogeneous occupational employment dynamics as a consequence of composition effects due to heterogeneous employment changes across industries and occupation specific within industry employment shifts due to differences in the short run substitutability between labor and capital services across occupations

fiscal policy interventions at the zero lower bound we build on a new keynesian dynamic stochastic general equilibrium dsge model to explore the macroeconomic consequences of fiscal expansionary shocks during the economic crisis of 2008 in the eurozone in this setting we find that the big four eurozone economies france germany italy and spain can effectively escape from their liquidity trap through fiscal policy interventions caused by government purchases we estimate the government spending multiplier to be above 1 8 when this policy is associated with a long term commitment to keeping the nominal interest rate at the zero lower bound as suggested by krugman 1998 notably the short term deficit effect on the budget balance can be offset five years after the implementation of a large spending program we also show that alternative policies with tax cuts that expand the supply do not appear to have the same power in the short run moreover we provide novel empirical evidence that a large government debt renders a government spending policy ineffective

risk aversion revisited in order to supply additional empirical evidence of the effect of wealth on relative risk aversion this study investigates households demand for risky assets using analysis of covariance techniques applied to the asset holdings of canadian individual households the extent and pattern of life cycle effects are also examined results generally point to decreasing relative risk aversion when housing is either excluded from the definition of wealth or treated as a riskless asset the investor s life cycle plays a prominent role in portfolio selection behavior with risk aversion increasing uniformly with age tax differentials do not seem to be an important element in investment decisions with respect to risk when the sample and wealth definitions are censored in order to approximate those of previous empirical studies their findings on relative risk aversion are generally corroborated this study presents an empirical investigation of the demand for risky assets of individual canadian households using data from the survey of consumer finances the results generally point to decreasing relative risk aversion when housing is either excluldied from the definition of wealth or treated as a riskless asset even when life cycle effects are controlled the investor s life cycle plays a prominent role in portfolio selection behavior with risk aversion increasing uniformly with age cohn lewellen schlarbaum 6 also found evidence of decreasing relative risk aversion using a restricted sample of stockowning investors while friend blume 12 concluded that constant relative risk aversion characterized household behavior the present study also finds that by restricting the sample and the wealth definitions to approximate those of cohn lewellenschlarbaum and those used by friend blume their empirical findings on relative risk aversion are generally corroborated the paper is divided into five sections the first reviews the literature on risk aversion and the second briefly describes the theory underlying the empirical tests the third section describes the data and statistical techniques used the empirical results are presented and discussed in the fourth section where the aggregate demand for risky assets is estimated and where the role of life cycle variables is examined the final section summarizes the main conclusions of the study

openness and the sectoral effects of fiscal policy based on structural var evidence for the u s we document that a rise in govemment spending generates three facts i an appreciation of the terms of trade 2 a fall in the price of traded vs non traded goods proxied by the price of goods relative to services and 3 a positive co movement between the manufacturing and the service sector both in consumption and production we show that even if govetument spending is assumed to be as intensive in goods and services as households consumption the relative price behavior can be explained as a simple implication of trade openness however a baseline open economy business cycle mtxlel has problems in rationalizing simultaneously the sectoral co movement of quantities and the behavior of relative prices this anomaly is enhanced if govemment spending is assumed to be intensive in non traded goods jel e i2 f41 e62

polarized business cycles abstract four stylized facts motivate this paper i business cycle movements are wider in emerging countries ec than in developed ones ii ec experience greater economic policy uncertainty iii ec are more polarized and less politically stable and iv epu is positively related to political polarization a standard real business cycle model augmented to incorporate political polarization a polarized business cycle pbc model is shown to be consistent with these facts we first derive our results analytically and then quantify the effects of a permanent increase in polarization to the us economy

electoral uncertainty fiscal policy and macroeconomic fluctuations abstract in this paper we study the link between elections fiscal policy and aggregate fluctuations the setup is a stylized dynamic stochastic general equilibrium model incorporating both technology and political re election shocks the latter are incorporated via a two party model with elections the main theoretical prediction is that forward looking incumbents with uncertain prospects of re election find it optimal to follow relatively shortsighted fiscal policies and that this hurts capital accumulation our econometric estimation using u s data finds a statistically significant link between electoral uncertainty and policy instruments and in turn macroeconomic outcomes

does neoclassical theory account for the effects of big fiscal shocks evidence from world war ii much debate surrounds the usefulness of the neoclassical growth model for assessing the macroeconomic impact of fiscal shocks we test the theory using data from world war ii which is by far the largest fiscal shock in the history of the united states we take observed changes in fiscal policy during the war as inputs into a parameterized dynamic general equilibrium model and compare the values of all variables in the model to the actual values of these variables in the data our main finding is that the theory quantitatively accounts for macroeconomic activity during this big fiscal shock

tales of fiscal adjustment fiscal adjustments why they can be expansionary this paper examines the evidence on fiscal adjustments in oecd countries from the early 1960s to today the results shed light on the recently observed phenomenon of fiscal tightening that produces non keynesian expansionary effects one interpretation is that a serious fiscal tightening increases demand wealth rises when future tax burdens decline and when interest rates decline credibility is restored and inflation or default risks abate both consumption and investment rise for this effect to produce an expansion the tightening must be sizeable and occur after a period of stress when the budget is quickly deteriorating and public debt is building up another interpretation emphasizes the supply side typically a fiscal consolidation based on tax increases is short lived to be long lasting it must include cuts in public employment transfers and government wages to be politically possible such a policy must be supported by trade unions these measures result in more efficient labour markets and boost the supply side based both on statistical evidence and on a detailed analysis of ten cases of major fiscal adjustment this article provides cautious support to the supply side view without denying a more limited role for the demand side channel alberto alesina and silvia ardagna

great expectations and the end of the depression what ended the great depression in the united states this paper suggests that the recovery was driven by a shift in expectations this shift was triggered by president franklin delano roosevelt s fdr policy actions on the monetary policy side roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre depression levels on the fiscal policy side roosevelt expanded real and deficit spending which helped make his policy objective credible the key to the recovery was the successful management of expecta tions about future policy roosevelt s rise to power is modeled as a policy regime change as in thomas sargent 1983 and peter temin and barry wigmore 1990 this paper formalizes temin and wigmore s argu ment in a repeated game setting using a dynamic stochastic general equilibrium dsge model and argues that the regime change can account for the recovery in the model a regime change means the elimination of certain policy dogmas that constrain the actions of the government the regime change generates an endogenous shift in expectations due to a coordination of mon etary and fiscal policy this coordination ended the great depression by engineering a shift in expectations from contractionary i e the private sector expected future economic contrac tion and deflation to expansionary i e the public expected future economic expansion and inflation the expectation of higher future inflation lowered real interest rates thus stimulating demand while the expectation of higher future income stimulated demand by raising permanent income

private debt overhang and the government spending multiplier evidence for the united states using state dependent local projections and historical us data we find that government spending multipliers are considerably larger in periods of private debt overhang in particular while multipliers are below or close to one in low private debt states we find significant crowding in of private spending in periods of debt overhang resulting in multipliers that are much larger than one in high private debt episodes more government purchases even reduce the ratio of government debt to gross domestic product these results are robust for the type of shocks and when we control for the business cycle financial crises deleveraging episodes government debt overhang and the zero lower bound

the elusive costs and the immaterial gains of fiscal constraints we study whether fiscal restrictions affect volatilities and correlations of macrovariables and the probability of excessive debt for a sample of 48 us states fiscal constraints are characterized with a number of indicators and volatilities and correlations are computed in several ways the second moments of macroeconomic variables in states with different fiscal constraints are economically and statistically similar excessive debt and the mechanism linking budget deficit and excessive debts are independent of whether tight or loose fiscal constraints are in place creative budget accounting may account for the results

durable goods inter sectoral linkages and monetary policy barsky house and kimball 2007 show that introducing durable goods into a sticky price model leads to negative sectoral comovement of production following a monetary policy shock and under certain conditions to aggregate neutrality these results appear to undermine sticky price models in this paper we show that these results are not robust to two prominent and realistic features of the data namely input output interactions and limited mobility of productive inputs when extended to allow for both features the sticky price model with durable goods delivers implications in line with var evidence on the effects of monetary policy shocks

imperfect mobility of labor across sectors and fiscal transmission abstract our paper investigates the sectoral effects of government spending shocks and highlights the role of labor mobility our var evidence for sixteen oecd countries reveals that a shock to government consumption by 1 of gdp increases non traded value added by 0 7 of gdp and generates a decline in traded value added the value added share of non tradables rises by 0 35 of gdp thus implying that the reallocation of resources accounts for 50 of the sectoral fiscal multiplier consistently our estimates show that the non traded sector is highly intensive in the government spending shock and experiences a labor inflow the shift of hours worked toward the non traded sector is however subject to mobility costs which vary across countries when we explore quantitatively the sectoral effects of a shock to government consumption that is highly intensive in non traded goods we find that the model can replicate the magnitude of the rise in the share of non tradables we document empirically once we allow for both labor mobility and capital installation costs financial openness also matters as it further biases the demand shock toward non tradables to account for the cross country dispersion in the responses of sectoral shares we estimate empirically we have to let the degree of labor mobility vary across countries

future fiscal and budgetary shocks abstract we study the effects of future tax and budgetary shocks in a non monetary and possibly non ricardian economy an unanticipated temporary labor tax cut to be effective on a given future date a delayed debt bomb causes at once a drop in the unit value placed on the firms business asset the customer with the result that share prices the hourly wage and employment drop in tandem this paradox of reduced activity through announcement of future stimulus does not hinge on an upward jump of long interest rates a future tax rate cut lacking a sunset provision has the same negative effects

how does uncertainty about future fiscal policy affect current macroeconomic variables a dynamic stochastic general equilibrium macromodel is constructed based on infinitely lived dynamically optimising households with labour market monopoly power randomness in future government spending causes randomness in the future output and price levels both when the money wage is flexible and when it is set one period in advance we show that through three different mechanisms rational anticipation of this depresses current aggregate demand if the wage is preset it thereby also depresses current output such fiscal uncertainty is suggested as one possible explanation for the faltering of the economic recovery in europe in 1995 and 1996

fiscal policy in the new neoclassical synthesis we analytically derive the cyclical effects of fiscal policy shocks in a new neoclassical synthesis model price stickiness has the consequence that a rise in government demand affects labor demand while at the same time the usual wealth effect boosts labor supply the strength of the demand effect depends on the response of the real interest rate governed by the monetary policy regime when the central bank controls money growth fiscal expansions are deflationary and might even be contractionary whereas output wages and inflation can increase when the rise in the real interest rate is dampened by an interest rate rule however price stickiness alone is not sufficient to explain a rise in consumption as predicted by keynesian theory

government spending shocks in quarterly and annual time series government spending shocks are frequently identified in quarterly time series data by ruling out a contemporaneous response of government spending to other macroeconomic aggregates we provide evidence that this assumption may not be too restrictive for annual time series data

interactions of monetary and fiscal policy via open market operations we examine interactions of monetary and fiscal policy in a sticky price model where public debt is non neutral as it provides transaction services this property is brought about by a legal restriction on open market operations by which only government bonds are eligible debt creation eases access to money and can therefore induce households to increase purchases of goods government expenditures which are not completely tax financed and deficit financed tax cuts then tend to stimulate private consumption however for these fiscal impulses to raise real activity monetary policy should not too aggressively aim at stabilising the economy

is the political business cycle for real abstract this paper constructs and examines a macroeconomic model which combines features from both real and political business cycle models we augment a standard real business cycle tax model by allowing for varying levels of government partisanship and competence in order to replicate two important empirical regularities first that on average the economy expands early under democratic presidents and contracts early under republican presidents second that presidents whose parties successfully retain the presidency have stronger than average growth in the second half of their terms the model generates both of these features that conform to u s post world war ii data

can public spending boost private consumption this paper analyses the effects on private consumption from an increase in productive and unproductive public spending a new keynesian model incorporating price and wage rigidities monetary policy and various fiscal rules is developed and estimated using bayesian techniques to capture the key cyclical characteristics of the us economy we find that price and wage rigidities along with a positive shock to the part of public spending that is productive are suficient to boost private consumption moreover we show that this initial positive reaction of private consumption is adequate to create a positive present value consumption multiplier for more than five years finally we show that our main results remain robust to changes in the monetary rule and the various methods of deficit financing

the effects of public spending externalities 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

fiscal multipliers in the 21st century fiscal multipliers appear to vary greatly over time and space based on vars for a large number of countries we document a strong correlation between wealth inequality and the magnitude of fiscal multipliers in an attempt to account for this finding we develop a life cycle overlapping generations economy with uninsurable labor market risk we calibrate our model to match key characteristics of a number of oecd economies including the distribution of wages and wealth social security taxes and government debt and study how a fiscal multiplier depends on various country characteristics we find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also to the average wealth level in the economy these findings together help us generate a cross country pattern of multipliers that is quite similar to that in the data

the output effect of fiscal consolidation plans abstract we show that the correct experiment to evaluate the effects of a fiscal adjustment is the simulation of a multi year fiscal plan rather than of individual fiscal shocks simulation of fiscal plans adopted by 16 oecd countries over a 30 year period supports the hypothesis that the effects of consolidations depend on their design fiscal adjustments based upon spending cuts are much less costly in terms of output losses than tax based ones and have especially low output costs when they consist of permanent rather than stop and go changes in taxes and spending the difference between tax based and spending based adjustments appears not to be explained by accompanying policies including monetary policy it is mainly due to the different responses of business confidence and private investment

sources and propagation of international output cycles common shocks or transmission abstract this paper studies the generation and transmission of international cycles in a multi country model with production and consumption interdependencies two sources of disturbance are considered and three channels of propagation are compared technology disturbances which are mildly correlated across countries are more successful than government expenditure disturbances in reproducing actual data the presence of a common component to the shocks and of production interdependencies appear to be crucial in quantitatively matching the properties of the data

fiscal spending shocks endogenous government spending and real business cycles abstract we analyze a real business cycle model in which the government optimally chooses public investment and nonmilitary current expenditures to maximize the welfare of the representative private agent we characterize the optimal response of endogenous spending to shocks to technology and to military expenditures comovements between the components of government spending and other macroeconomic aggregates predicted by the model are compared with the corresponding comovements in the u s data the model captures the qualitative features of the relative volatilities of the components of government spending quite well but predicts too high correlations between the components of government spending and output

the recovery of risk preferences from actual choices since its introduction the expected utility hypothesis has been widely used in the construction of economic models more recently attention has focused on the conditions under which it is possible in principle to recover individual investors risk preferences from their demand for assets dybvig and polemarchakis 2 this paper represents a first attempt to recover preferences operationally from data on the actual demand for assets numerous difficulties are encountered in attempting to measure preferences toward risk in a real world setting preferences are revealed through the choices of an individual but in an uncertain world these choices also depend on his expectations of future events hence an immediate problem arises in separating the influences of each on such decisions problems can also arise in measuring other variables such as wealth which influence choices because of these difficulties efforts to classify and measure an individual s risk preferences have been confined to direct assessments in hypothetical environments e g kahneman and tversky 4 and keeney and raiffa 5 pp 203 212 2 in these studies the authors assumed that stated preferences are accurate indicators of actual behavior the question remains however whether individuals actually behave in the way their assessments predict the purpose of this note is to make some progress in answering this question in it an experiment is described which infers an individual s risk preferences from his actual choices in a real world environment specifically the risk aversion of a dealer in u s government securities is assessed directly and then estimated statistically from his actual demand for bills in the weekly treasury auctions the distribution of returns used in the analysis are calculated from the forecasts made by the dealer himself in addition to introducing new procedures for measuring preferences this study provides insights into the reliability of direct assessments in predicting the actual behavior