Industry Evidence on the Effects of Government Spending / Christopher J. Nekarda, Valerie A. Ramey.

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Nekarda, Christopher J

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w15754.Publication details: Cambridge, Mass. National Bureau of Economic Research 2010.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper investigates industry-level effects of government purchases in order to shed light on the transmission mechanism for government spending on the aggregate economy. We begin by highlighting the different theoretical predictions concerning the effects of government spending on industry labor market equilibrium. We then create a panel data set that matches output and labor variables to shifts in industry-specific government demand. The empirical results indicate that increases in government demand raise output and hours, but lower real product wages and productivity. Markups do not change as a result of government demand increases. The results are consistent with the neoclassical model of government spending, but they are not consistent with the New Keynesian model of the effects of government spending.

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Previous	nber w15751 Intermediation and Economic Integration /	nber w15752 Public Avoidance and the Epidemiology of novel H1N1 Influenza A /	nber w15753 What Determines European Real Exchange Rates? /	nber w15754 Industry Evidence on the Effects of Government Spending /	nber w15755 Which Parts of Globalization Matter for Catch-up Growth? /	nber w15756 Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy /	nber w15757 Optimal Target Criteria for Stabilization Policy /	Next

February 2010.

This paper investigates industry-level effects of government purchases in order to shed light on the transmission mechanism for government spending on the aggregate economy. We begin by highlighting the different theoretical predictions concerning the effects of government spending on industry labor market equilibrium. We then create a panel data set that matches output and labor variables to shifts in industry-specific government demand. The empirical results indicate that increases in government demand raise output and hours, but lower real product wages and productivity. Markups do not change as a result of government demand increases. The results are consistent with the neoclassical model of government spending, but they are not consistent with the New Keynesian model of the effects of government spending.