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SECTORAL COMPOSITION OF GOVERNMENT SPENDING AND MACROECONOMIC (IN)STABILITY
Author(s) -
Chang JuinJen,
Guo JangTing,
Shieh JhyYuan,
Wang WeiNeng
Publication year - 2015
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12127
Subject(s) - economics , consumption (sociology) , determinacy , investment (military) , government spending , monetary economics , business cycle , externality , investment goods , microeconomics , public good , macroeconomics , welfare , market economy , mathematical analysis , social science , mathematics , sociology , politics , political science , law
This article examines the quantitative interrelations between sectoral composition of public spending and equilibrium (in)determinacy in a two‐sector real business cycle model with positive productive externalities in investment. When government purchases of consumption and investment goods are set as constant fractions of their respective sectoral output, we show that the public‐consumption share plays no role in the model's local dynamics, and that a sufficiently high public‐investment share can stabilize the economy against endogenous belief‐driven cyclical fluctuations. When each type of government spending is postulated as a constant proportion of the economy's total output, we find that there exists a trade‐off between public consumption versus investment expenditures to yield saddle‐path stability and equilibrium uniqueness. ( JEL E32, E62, O41)