The effects of public spending externalities |
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Institution: | 1. Department of Economics and Statistics, Università degli Studi di Salerno, Via Ponte Don Melillo, 84084 Fisciano (SA), Italy;3. CELPE, Centro di Economia del Lavoro e di Politica Economica Università degli Studi di Salerno, Italy;4. Research Department, International Monetary Fund, 700 19th Street N.W., Washington, D.C. 20431, United States;5. CESifo, Center for Economic Studies and Ifo Institute, Poschingerstr. 5, 81679 München, Germany |
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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’. |
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Keywords: | Public spending externalities Fiscal multipliers Government consumption Government investment DSGE models Bayesian estimation |
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