Industry Evidence on the Effects of Government Spending

35 Pages Posted: 18 Mar 2011

See all articles by Christopher J. Nekarda

Christopher J. Nekarda

Board of Governors of the Federal Reserve System

Valerie A. Ramey

University of California at San Diego; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2010

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.

Keywords: Government spending, transmission, hours, productivity, real wage

Suggested Citation

Nekarda, Christopher J. and Ramey, Valerie A., Industry Evidence on the Effects of Government Spending (June 1, 2010). FEDS Working Paper No. 28, Available at SSRN: https://ssrn.com/abstract=1786781 or http://dx.doi.org/10.2139/ssrn.1786781

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Valerie A. Ramey

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