This paper introduces public consumption—hence the size of the public sector—into an efficiency wage model of the labour market. The effect of a simultaneous rise in taxes and public consumption on unemployment is derived. There arises an unambiguous positive relationship between the size of the public sector and equilibrium unemployment if public and private consumption are substitutes and wages are taxed. The impact of taxes on consumption on unemployment, although in general not equal to zero, is ambiguous.
This article investigates how increased uncertainty affects the effectiveness of public consumption on economic activity. The paper examines three main issues: first, the influence of uncertainty on output and macroeconomic aggregates. Second, the effects of public consumption on the economy. Third, the impact of a simultaneous shock of uncertainty and government consumption on economic activity. We use Vector Autoregression (VAR) models for the United States, Brazil and a panel VAR with six European countries. The empirical results indicate a disruptive effect of uncertainty on GDP, private consumption, investment and hours worked. The fiscal effects point to slightly different results for the two countries. For Brazil and the United States, the increase in public spending has positive and significant effects on GDP. Regarding the effects of government consumption (high uncertainty), the fiscal effects are not statistically significant, while in times of low uncertainty the effects are positive and significant. Subsequently, we designed a Dynamic Stochastic General Equilibrium (DSGE) model akin to Basu and Bundick (2017), and added three features: tax on labor income, the relationship between private consumption and government consumption and a simultaneous shock of uncertainty and government consumption. The model highlights four main conclusions. First, the negative influence of uncertainty on economic activity. Second, risk aversion magnifies the impact of the macroeconomic response. Third, public consumption has positive effects on economic activity. Finally, we examine the sensitivity of the economy's responses to different configurations of the relationship between public and private consumption, under normal conditions or uncertainty shocks. The findings suggest that, when the economy is hit by a simultaneous shock of uncertainty and public consumption, it obscures the effectiveness of the fiscal stimulus on the economy, corroborating the empirical results. ; info:eu-repo/semantics/publishedVersion
This paper compiles a novel dataset of time-varying measures of government consumption cyclicality for a panel of 46 African economies between 1960 and 2014. Government consumption has, generally, been highly procyclical over time in this group of countries. However, sample averages hide serious heterogeneity across countries with the majority of them showing procyclical behavior despite some positive signs of graduation from the "procyclicality trap" in a few cases. By means of weighted least squares regressions, we find that more developed African economies tend to have a smaller degree of government consumption procyclicality. Countries with higher social fragmentation and those are more reliant on foreign aid inflows tend to have a more procyclical government consumption policy. Better governance promotes counter- cyclical fiscal policy whileincreased democracy dampens it. Finally, some fiscal rules are important in curbing the procyclical behavior of government consumption. ; info:eu-repo/semantics/publishedVersion
The collective choice of public consumption expenditure is reconsidered when voters are socially mobile. In accordance with previous work on social mobility and political economics, the analysis concerns a class of mobility processes that induce mappings from initial income to expected future income that are monotonically increasing and concave. The paper abstracts from the explicitly redistributive role of government and concentrates on public consumption which is modeled as a classical public good. In equilibrium, provision is sensitive to the degree of social mobility, theoretically linking social mobility to public consumption. Further, empirical puzzles about the impact of voting franchise extensions on the growth of government spending are addressed within the context of social mobility. Adapted from the source document.
In this paper we set up a NK-DSGE model in which the consumer derives utility from a consumption basket made of public and private consumption, there is monopolistic competiton in the intermediate good sector, Calvo-Yun price setting, endogenous labour supply and Taylor rule for monetary policy. We analyse the effects of a counterciclical fiscal policy rule and how varying the degree of counterciclicality affects the determinacy of the rational expectations equilbrium and the ability to respond to technological and government spending shocks. A broad conclusion is that desiderability of pro/counter ciclical stance of fiscal policy cannot accurately be drawn without taking into account the quality of the public expenditure and the way it interacts with private consumption.
