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EXPANSIONARY VERSUS CONTRACTIONARY GOVERNMENT SPENDING
Author(s) -
Makin Anthony J.
Publication year - 2015
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/coep.12051
Subject(s) - austerity , economics , government spending , monetary economics , fiscal policy , stimulus (psychology) , consumption (sociology) , public investment , fiscal multiplier , business cycle , productivity , monetary policy , public spending , inflation (cosmology) , public expenditure , investment (military) , government expenditure , interest rate , macroeconomics , public finance , welfare , market economy , psychology , social science , physics , sociology , politics , theoretical physics , political science , law , psychotherapist
This article theoretically examines the impact of different forms of government spending on national income in a financially open economy with a significant net international investment position the central bank of which sets domestic interest rates to target inflation. It shows that whether government spending is expansionary or contractionary ultimately depends on the productivity of that expenditure, a result that has major implications for the efficacy of fiscal policy deployed for either stimulus or austerity reasons. The key prediction of the model is that public consumption and unproductive public investment are procyclical, whereas only productive public investment is countercyclical . ( JEL F41)