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Assessing the Impact of a Change in the Composition of Public Spending :, A DSGE Approach, Ivan Tchakarov, Roland Straub

Despite intense calls for safeguarding public investment in Europe, public investment expenditure, when measured in relation to GDP, has steadily fallen in the last three decades, evoking fears that economic activity may be correspondingly negatively affected. At the same time, however, public consumption in the EU-12 countries has trended up. In this paper, we provide a macroeconomic assessment of the observed change in the composition of public spending in the euro area in a medium-scale two-country dynamic stochastic general equilibrium (DSGE) model. First, we identify the channels through which both temporary and permanent public investment shocks generate larger fiscal multipliers than exogenous increases in public consumption. Second, we quantify the negative impact of a change in fiscal stance, characterized by a permanent rise in public consumption and a permanent fall in public investment, keeping the overall level of public spending constant. The key message of the paper is that calls for reversing the observed trend in the composition of public spending are well justified
Table Of Contents
Contents; I. Introduction; II. Public Investment and Public Consumption in the Euro Area; III. Is Public Investment Beneficial for Economic Activity?; IV. The Framework; A. The Model; B. Changes to the Baseline Model; C. Calibration; V. Temporary Shocks to Public Spending; A. Public Consumption; B. Public Investment; C. Sensitivity Analysis; VI. What is the Impact of a Change in the Composition of Public Spending; A. Policy Scenario; VII. Conclusion; Appendix A; Appendix B; Figures; 1. Public Investment in EU-12 and the U.S, 1970-2005; 2. Public Consumption in EU-12 and the U.S, 1970-2005
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (49 p.)
Specific Material Designation
Form Of Item

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