The changing structure of government consumption spending

Series: Working Papers. 1840.

Author: Alessio Moro and Omar Rachedi.

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The changing structure of government consumption spending (1 MB)

Abstract

We document a secular increase in the share of purchases from the private sector in
government consumption spending: over time the government purchases relatively more
private-sector goods, and relies less on its own production of value added. We build a
general equilibrium model in which investment-specific technological change accounts
for the changing structure of government spending. The model predicts that this secular
process alters the transmission of government spending shocks by raising the response of
private value added, while dampening the response of hours. We validate these results with
novel empirical evidence on the effects of government spending across countries.