The effects of public spending externalities

Valerio Ercolani, João Valle e Azevedo

Research output: Contribution to journalArticlepeer-review

8 Citations (Scopus)

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'.

Original languageEnglish
Pages (from-to)173-199
Number of pages27
JournalJournal of Economic Dynamics and Control
Volume46
DOIs
Publication statusPublished - 2014

Keywords

  • Bayesian estimation
  • DSGE models
  • Fiscal multipliers
  • Government consumption
  • Government investment
  • Public spending externalities

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