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Assessing the Impact of a Change in the Composition of Public Spending: A DSGE Approach

Assessing the Impact of a Change in the Composition of Public Spending: A DSGE Approach by Ivan Tchakarov
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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.
International Monetary Fund; July 2007
47 pages; ISBN 9781452769288
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Title: Assessing the Impact of a Change in the Composition of Public Spending: A DSGE Approach
Author: Ivan Tchakarov; Roland Straub
 
ISBNs
1451911858
9781451867329
9781451911855
9781452769288