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Government production, complementarity and the effects of government spending shocks

Zipeng Zhou

This paper reconsiders the effect of government spending on the private sector economy through input and output channels of government production. I introduce a long-run benign government producer to an otherwise standard two-sector business cycle model with price rigidity. I model government production, distinguishing between different categories of inputs, including employment, intermediate goods and capital goods and different categories of outputs. Specific inputs and outputs are classified according to their elasticity of substitution with private consumption. Given the average level of complementarity/substitutability between private consumption, labor supply, and government outputs, I explore the effects of shocks to the different components of government production. The results indicate that a fiscal policy which can fine-tune the allocation of government inputs and the categories of government outputs is able to span the whole range of theoretical results on the responses of private consumption, private output, real wage and private labor to a government spending shock.

(日期:2016-08-22 作者:Working Paper 来源:)