Government spending

Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual or collective needs of the community, is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment (government gross capital formation). These two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of gross domestic product. Government spending can be financed by government borrowing, taxes, custom duties, the sale or lease of natural resources, and various fees like national park entry fees or licensing fees. When Governments choose to borrow money, they have to pay interest on the money borrowed. Chan

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Fiscal Policy, Relative Prices and Net Exports in a Currency Union

Christian Pröbsting

This paper studies the effects of fiscal policy on net exports, the terms of trade and expenditure switching. Using data on government spending and consumption taxes for twelve euro area countries over 1996 to 2018, it shows that fiscal austerity shocks improve net exports. This improvement in the trade balance is driven by falling imports while exports do not respond; export and import prices co-move and the terms of trade does not deteriorate in response to an austere shock. The empirical evidence confirms asymmetric expenditure switching, as domestic consumers switch towards domestically produced goods while foreign consumers fail to do so. In a second step, we rationalize these findings in a multi-product small-open DSGE model that features GHH preferences, a non-traded consumption good and pricing to market.

2020

AUSTERITY IN THE AFTERMATH OF THE GREAT RECESSION

Christian Pröbsting

We examine austerity in advanced economies since the Great Recession. Austerity shocks are reductions in government purchases that exceed reduced-form forecasts. Austerity shocks are statistically associated with lower real GDP, lower inflation and higher net exports. We estimate a cross-sectional multiplier of roughly 2. A multi-country DSGE model calibrated to 29 advanced economies generates a multiplier consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity shocks were sufficiently contractionary that debt-to-GDP ratios in some European countries increased as a consequence of endogenous reductions in GDP and tax revenue

NBER2017

Deep Habits, Price Rigidities and the Consumption Response to Government Spending

This paper inspects the 'deep' habits mechanism originally used by Ravn, Schmitt-Grohé and Uribe (2006) to generate the positive comovement of public and private consumption observed in many VAR studies. In their set-up, the price-elasticity of demand is pro-cyclical and it is optimal for the firm to lower the mark-up while expanding production after the fiscal shock, raising the demand for labor and the real wage. Consequently, agents substitute consumption for leisure and overcome the negative wealth effect of the fiscal expansion. Here, we show that increasing price stickiness reduces the impact of the fiscal shock on the real wage and hinders the rise of consumption. If the degree of price stickiness is high enough, consumption is crowded-out. This is in contrast to the role of price rigidities in the standard New Keynesian model where they weaken the crowding-out of consumption.

Ghent University Faculty of Economics and Business Administration Working Paper 2010/6412011

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Economics (ˌɛkəˈnɒmᵻks,_ˌiːkə-) is a social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of econom

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A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to collectively fund government spending

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