Effects of government spending on private investment

This paper investigates the effects of military and non-military public expenditures on gross private investment using cointegration and error-correction analysis. The latter type of public spending is disagreggated into expenditures of infrastructure, consumption and other general government expenditures. The empirical evidence from four emerging European countries namely, Greece, Ireland, Portugal and Spain suggests that in some cases public capital spending stimulates investment, while in others it depresses it. Also, the results tentatively indicate that defence spending exerts no influence on private investment, thus adding to the ongoing controversy of the economic effects of military spending.     

The government spending and private consumption: a panel cointegration analysis

In this article, whether an increase in government spending will crowd out the private consumption is re-examined. This article augments the empirical literature by extending this issue to panel data. The empirical framework applies the panel cointegration model, dynamic OLS (DOLS), proposed by Kao and Chiang [On the estimation and inference of a cointegrated regression in panel data. Working Paper, Economics Department, Syracuse University, 1999.]. Evidence from 24 OECD countries indicates a significant degree of substitutability between government spending and private consumption when the real disposable income is included, which rejects the permanent income hypothesis. The existence of crowding out renders the Keynesian plea for expansionary fiscal policy unconvincing.     

The international effects of government spending composition

This paper incorporates a distinction between spending for government employment and spending for non-wage government consumption in a ‘new open economy macroeconomics’ model. Our results show that a permanent reduction in public employment in one country increases relative private consumption and appreciates the domestic exchange rate. We also compare announced reductions in domestic government employment and consumption, showing that these two policies have the same qualitative effects. When the reduction in public employment is used to finance increased government non-wage spending, the analytical results of the model are ambiguous, but a numerical analysis shows that relative consumption increases for a reasonable parameterization.     

Macroeconomic effects of government spending in China

Government spending plays an important role in determining economic performances in China. Its macroeconomic effects are analysed in this paper. We show that government spending in China Granger‐causes output, consumption and investment booms as well as inflation, and has a multiplier larger than 1. The large multiplier effects are found not only in aggregated time‐series data but also in panel data at the provincial level. We also provide a theoretical model and Monte Carlo analysis to rationalize our empirical findings. Our theoretical and Monte Carlo analyses support the large multiplier found in China but also suggest that government spending is not necessarily a free lunch in spite of the large multiplier effects.     

Effects of government expenditure on private investment: Canadian empirical evidence

The purpose of this study is to investigate the relationship between government expenditures and private investment in Canada during the period 1961 to 2000. To this end, effects of five categories of government expenditures on investment are examined within the cointegration and error-correction framework. The empirical results show that government expenditure on education and health has positive effects whereas government expenditures on capital and infrastructure have negative effects on private investment. The other expenditure categories, including government expenditure on protection of persons and property, expenditure on debt charges, and expenditure on government and social services have no significant effects on private investment.I wish to thank Baldev Raj for his valuable comments on this study which have led to an important improvement in the paper. I would also like to thank my colleagues Tomson Ogwang, Paul Bowles, Jalil Safaei, and an anonymous referee for their comments. However, the usual disclaimer applies.First version Received: May 2002/Final version received:20 May 2004     

Why does private consumption rise after a government spending shock?

Abstract.  Some recent empirical evidence suggests that private consumption is crowded-in by government spending. This outcome violates neoclassical macroeconomic theory, according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption. In this paper, we develop a simple real business cycle model where preferences depend on private and public spending, and households are habit forming. The model is estimated by the maximum-likelihood method using U.S. data. Estimation results indicate a strong Edgeworth complementarity between private and public spending. This feature enables the model to generate a positive response of consumption following a government spending shock. In addition, the impulse-response functions generated by the estimated model are generally consistent with those obtained from a benchmark vector autoregression.     

The effects of fiscal consolidations on the composition of government spending

ABSTRACT

In response to increasing debt paths, governments often implement fiscal consolidation programs. This paper studies the impact of these programs on the composition of government spending. System-GMM estimations performed on a sample of 53 developed and emerging countries over 1980–2011 reveal that fiscal consolidations significantly reduce the government investment-to-consumption ratio, i.e. a composition effect. Robust to a wide set of tests, including when using the narrative approach to identify fiscal consolidations, this significantly stronger contraction of government investment with respect to government consumption is at work particularly when debt is high and in the low phase of the economic cycle. Therefore, in such contexts, fiscal consolidations aimed at short-run stabilization may hurt the economy in the long-run through their detrimental effect on public investment, calling for a reflection upon how they could be re-designed to allow avoiding such undesirable consequences.     

The effects of government spending shocks on consumption under optimal stabilization

Economic theory has yet to come up with a general guidance regarding the dynamic effects and welfare implications of shocks to public spending. With the aim to provide a theoretical benchmark, we analyse if a rise in private consumption following an exogenous rise in government spending is a feature of the economy under optimal stabilization in a standard New Keynesian setting augmented for the presence of liquidity-constrained agents and non-separable preferences. Our results provide little evidence in support of a crowding-in effect under ‘timelessly optimal’ policy.     

Empirical studies on the relationship between public and private investment and GDP growth

This study performs empirical studies on the interaction between public and private investment and GDP growth for Japan and the USA. Since the data for each country used show features that are quite different from each other, empirical methods of GMM (Generalized Method of Moments) and OLS (Ordinary Least squares) are accordingly applied to Japan and the USA, respectively. The empirical results suggest that both public and private investment make great contributions to Japanese economic growth, while the US private investment seems to play a much more significant role than public investment.     

The effects of foreign direct investment on private domestic investment: evidence from developing countries

The main objective of this study is to make a contribution to the empirical literature of investment by examining the effects of FDI inflows on private investment in developing host countries. We employ panel data for 91 developing host countries over the period 1970–2000 and estimate our model by a means of system generalized method of moments. The results show that FDI stimulates private domestic investment which supports the “crowd-in-hypothesis”. Moreover, after grouping countries based on their level of income, we find that the positive effects of FDI on private investment in low-income countries depend on the availability of human capital.     

Disaggregated approach to government spending shocks: a theoretical analysis

We calibrate a dynamic stochastic general equilibrium model that features a transmission mechanism with different types of government spending, while the literature usually treats government spending as a homogenous compound. In this regard, we manage to distinguish between different types of government spending (namely: government investment, government wage component consumption and non-wage component consumption) where each type of spending has a varied role in the economy. The government wage increase has the largest positive effect both on private consumption and output by affecting the economy through the government production. This is a natural consequence of government production being complementary to private consumption in our model. Other two government spending types, namely government non-wage consumption and government investment, also have positive effects on output, whereas their responses on (private) consumption are mostly negative. These results provide an alternative explanation for the wide range of multipliers existing in the literature as our setup enables them to produce different effects on macroeconomic variables.     

Macroeconomic effects of government spending shocks: New narrative evidence from Canada

This paper examines the macroeconomic effects of government spending shocks in Canada for the period of 1949–2012. We construct a novel measure of news about exogenous government spending changes identified through the narrative approach. We use government documents, mostly the budget speech, to identify the size, timing, and principal motivation for all planned major federal government spending changes. To achieve identification, we consider those changes that are unrelated to the contemporaneous movements in the economy. The implied government spending multiplier estimates using our exogenous government spending news series are between 1.08 and 1.69.     

The effects of government spending shocks on the real exchange rate and trade balance in Turkey

The aim of this study is to investigate the effects of government spending shocks on the real exchange rate and foreign trade balance in Turkey for the period of 2002:01–2012:04 within a structural VAR framework. The analysis shows that a positive shock to the government spending tends to induce real exchange rate appreciation and deterioration in trade balance. We also find that the composition of the government spending matters. Although shocks to the government nonwage consumption generate an appreciation in the real exchange rate and worsening of the trade balance, the effects of government investment shocks remain insignificant. Furthermore, the analysis demonstrates that shocks to government spending are associated with a rise in taxes, which is indicative of a spending-driven tax adjustment process in Turkey.     

Trend productivity growth and the government spending multiplier

The paper analyzes the effects of government spending shocks under alternative rates of trend growth in a New-Keynesian model characterized by price and wage rigidity. We show that the presence of trend growth makes the impact on output and consumption of government spending shocks smaller but more persistent with a hump shaped impulse response. Our results imply that the impact government spending multiplier decreases while the cumulative multiplier increases with trend growth.     

Asymmetric output growth effects of government spending: Cross-sectional and panel data evidence

Using a model that accommodates asymmetric adjustments of output growth to changes in growth of government spending, the effects of aggregate and disaggregate government spending variables on output growth are examined. Both cross-section and panel regression estimations are conducted. Robustness of results to joint-endogeneity of output and government spending, alternative conditioning variables, and cointegration is investigated. Aggregate government spending appears to have positive output growth effects particularly in periods of below-trend growth in this variable. The government sector's productivity appears to be higher than non-government sector's productivity when spending growth is below-trend growth and only for non-OECD countries; no differences in sectoral productivities are detected for OECD countries. Government consumption spending has no significant output growth effects, but government investment spending has positive output growth effects particularly when its growth falls below its trend-growth; this favorable effect turns negative when government investment spending growth exceeds its trend-growth. Results are robust across alternative model specifications and estimation methods.     

On the size of government spending multipliers in Europe

This article compares the size of government spending multipliers in Europe by applying a panel structural vector autoregression analysis on 11 eurozone and 8 non-eurozone countries using quarterly data from 1991Q1 to 2012Q4. We find that (i) spending multipliers are smaller in eurozone compared to non-eurozone countries, (ii) across the euro area the impact of government spending on GDP has been higher before than after the introduction of the euro, (iii) spending multipliers are larger in the eurozone periphery than in the core countries and (iv) since the beginning of the recent financial crisis, spending multipliers have become larger both for eurozone and for non-eurozone countries. We relate these results to an emerging theoretical literature linking the size of fiscal multipliers to the monetary policy stance. We also discuss the implications of our findings for the effectiveness of fiscal policy in Europe.     

Nonlinear effects of government debt on private consumption: Evidence from OECD countries

This paper investigates nonlinear effects of government debt on private consumption. The estimated consumption function shows smooth regime switching depending on the debt-to-GDP ratio, and a higher level of government debt crowds out private consumption to a greater extent.     

Does R&D spending boost tangible investment? An analysis on European firms

This article investigates the relationship between firm’s R&D intensity, expressed as R&D expenditure over sales, and investment intensity in tangible assets. It is commonly acknowledged that R&D requires additional physical investment to be implemented. R&D increases a firm’s productivity and return to tangible investments, thus, providing to the firm incentives to bear high tangible capital costs and to invest more. This represents a crucial issue for a firm’s growth, particularly considering the strong interaction between physical capital accumulation and technological progress. The analysis is based on a large sample of manufacturing firms across seven European countries in the period 2007–2009. Since the sub-sample of firms performing R&D might not be random, there may potentially be an endogeneity issue. The analysis also considers that firms may decide to spend on R&D and investment in physical capital simultaneously. The questions of both endogeneity and simultaneity are dealt with by employing an instrumental variable two-step procedure. We find a positive and significant impact of R&D intensity on firms’ tangible investment intensity. The econometric results highlight the importance of financial factors, particularly with respect to firms’ internal resources. Exposure to international trade has a negative impact on investment, possibly depending on the time-span of the sample used.

Abbreviations: Technological Innovation and R&D; Investment Capital; Industry Studies; Firm Behavior; Empirical Analysis     

The dynamic effects of monetary policy and government spending shocks on unemployment in the peripheral Euro area countries

In this paper we study the response of unemployment to monetary policy and government spending shocks in the peripheral Euro-area countries. By applying the structural near-VAR methodology, we jointly model area-wide and national variables. Our main finding is that fiscal multipliers vary across countries and the results are consistent with the prediction of the standard New Keynesian model only in Italy and Greece. Instead, in Ireland, Portugal and Spain increases in government spending are recessionary. Thus we find that Keynesian results of fiscal policy seem to prevail in high public-debt countries, whereas non-Keynesian outcomes seem to characterize high private-debt countries. As for the monetary policy shock, we find that it plays an important role, jointly with the other area-wide shocks, as a long-term driver of national unemployment.     

Effects of monetary and government spending policy on economic inequality

Using detailed micro-level income and expenditure data, we study the effects of monetary and government spending policy shocks on income and expenditure inequality in the US from 1990 to 2018. We find that expansionary monetary and government spending policy shocks systematically decrease income, disposable income and expenditure inequality. There is evidence of time variation on the effects and monetary policy and transfer payment shocks. Various impulse responses suggest that the impacts of the policy shocks increase during and after the Great Recession. The responses of income and expenditures of households at different percentiles suggest that expansionary monetary and government spending policy have a larger positive impact on households with low income and expenditures relative to those at the top of the distribution. We do not find evidence of the significant impact of Quantitative Easing policies on income inequality, however, expenditure inequality appear to increase due to the policies.