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Evaluating Changes in the Transmission Mechanism of Government Spending Shocks

  • Nooman Rebei EMAIL logo
Published/Copyright: August 3, 2020
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 21 Issue 1

Abstract

We empirically revisit the crowding-in effect of government spending on private consumption based on rolling windows of U.S. data. Results show that in earlier samples government spending is increasingly crowding in private consumption; however, this relation is reverted in the latest periods. We propose a model embedding non-separable public and private consumption in the utility function and rule-of-thumb consumers to assess the sources of non-monotonic changes in the transmission of the shock. The iterative full information estimation of the model reveals that changes in the co-movement between private and public spending is primarily driven by the fluctuations in the elasticity of substitution between private and public consumption, the share of financially constrained consumers, and the elasticity of intertemporal substitution.

Keywords: Bayesian vector autoregression; government spending; rule-of-thumb consumers; government spending in utility; tax rule
JEL classification: E2; E6; H3; H5
Corresponding author: Nooman Rebei, International Monetary Fund, 700 19th St. NW., Washington, DC, 20431, USA, E-mail:
Correction Note: Correction made on 16 March 2021 after the article was published online: Mistakenly this article was first published in the “Contributions” category instead of “Advances”.

Appendix A Estimation Results

Table A1:

Recursive Bayesian estimation.

Prior distribution Posterior averages and 90 percent confidence intervals
shape mean s.d. 1950 − 1980 1953 − 1983 1956 − 1986 1959 − 1989 1962 − 1992 1965 − 1995 1968 − 1998 1971 − 2001 1974 − 2004 1977 − 2007 1980 − 2010 1983 − 2013 1985 − 2015
Φ Gamma 0.5 0.2 0.248 [ 0.137 , 0.360 ] 0.275 [ 0.154 , 0.401 ] 0.310 [ 0.175 , 0.452 ] 0.323 [ 0.175 , 0.472 ] 0.301 [ 0.171 , 0.426 ] 0.296 [ 0.165 , 0.420 ] 0.282 [ 0.165 , 0.397 ] 0.319 [ 0.173 , 0.452 ] 0.316 [ 0.185 , 0.445 ] 0.482 [ 0.278 , 0.666 ] 0.482 [ 0.284 , 0.678 ] 0.420 [ 0.261 , 0.579 ] 0.525 [ 0.350 , 0.694 ]
σ Normal 1.0 0.5 1.622 [ 1.035 , 2.183 ] 1.861 [ 1.208 , 2.429 ] 1.703 [ 1.073 , 2.352 ] 1.711 [ 1.041 , 2.386 ] 1.579 [ 0.941 , 2.190 ] 1.548 [ 0.926 , 2.167 ] 1.477 [ 0.824 , 2.101 ] 1.618 [ 0.958 , 2.263 ] 1.574 [ 0.973 , 2.136 ] 1.989 [ 1.343 , 2.587 ] 2.028 [ 1.394 , 2.637 ] 2.190 [ 1.607 , 2.777 ] 2.244 [ 1.637 , 2.838 ]
χ Gamma 5.0 3.0 1.342 [ 0.196 , 2.628 ] 5.395 [ 0.554 , 9.409 ] 9.208 [ 4.657 , 13.512 ] 9.861 [ 4.293 , 15.091 ] 9.279 [ 4.130 , 14.433 ] 9.253 [ 4.186 , 14.608 ] 8.365 [ 3.108 , 12.892 ] 8.645 [ 3.673 , 14.128 ] 7.602 [ 2.707 , 12.279 ] 5.656 [ 2.497 , 8.881 ] 6.333 [ 2.609 , 9.977 ] 5.869 [ 1.558 , 9.640 ] 5.965 [ 1.389 , 10.770 ]
κ Beta 0.7 0.1 0.720 [ 0.564 , 0.885 ] 0.725 [ 0.574 , 0.883 ] 0.714 [ 0.551 , 0.875 ] 0.720 [ 0.572 , 0.880 ] 0.718 [ 0.558 , 0.879 ] 0.715 [ 0.565 , 0.884 ] 0.706 [ 0.547 , 0.873 ] 0.721 [ 0.564 , 0.884 ] 0.711 [ 0.546 , 0.878 ] 0.713 [ 0.565 , 0.876 ] 0.716 [ 0.557 , 0.866 ] 0.746 [ 0.593 , 0.901 ] 0.747 [ 0.584 , 0.910 ]
ν Gamma 0.7 0.2 0.707 [ 0.450 , 0.948 ] 0.689 [ 0.419 , 0.982 ] 0.663 [ 0.426 , 0.865 ] 0.640 [ 0.374 , 0.927 ] 0.497 [ 0.342 , 0.634 ] 0.498 [ 0.329 , 0.681 ] 0.476 [ 0.335 , 0.623 ] 0.572 [ 0.353 , 0.800 ] 0.475 [ 0.348 , 0.601 ] 0.708 [ 0.437 , 0.984 ] 0.619 [ 0.391 , 0.874 ] 0.591 [ 0.344 , 0.861 ] 0.575 [ 0.306 , 1.044 ]
γ Beta 0.5 0.2 0.622 [ 0.489 , 0.749 ] 0.583 [ 0.462 , 0.705 ] 0.537 [ 0.414 , 0.657 ] 0.527 [ 0.405 , 0.674 ] 0.551 [ 0.422 , 0.677 ] 0.582 [ 0.472 , 0.702 ] 0.615 [ 0.505 , 0.731 ] 0.571 [ 0.454 , 0.677 ] 0.568 [ 0.440 , 0.696 ] 0.445 [ 0.333 , 0.554 ] 0.466 [ 0.347 , 0.575 ] 0.464 [ 0.338 , 0.591 ] 0.458 [ 0.331 , 0.579 ]
ϕ g Gamma 0.1 0.1 0.118 [ 0.029 , 0.209 ] 0.118 [ 0.031 , 0.203 ] 0.123 [ 0.027 , 0.211 ] 0.119 [ 0.029 , 0.208 ] 0.112 [ 0.028 , 0.195 ] 0.115 [ 0.029 , 0.198 ] 0.115 [ 0.029 , 0.203 ] 0.125 [ 0.029 , 0.220 ] 0.107 [ 0.026 , 0.186 ] 0.109 [ 0.027 , 0.190 ] 0.112 [ 0.025 , 0.192 ] 0.111 [ 0.023 , 0.191 ] 0.111 [ 0.027 , 0.193 ]
ϕ b Inv-gamma 0.5 4.0 0.228 [ 0.125 , 0.319 ] 0.210 [ 0.123 , 0.294 ] 0.272 [ 0.144 , 0.384 ] 0.260 [ 0.127 , 0.376 ] 0.191 [ 0.112 , 0.268 ] 0.203 [ 0.120 , 0.287 ] 0.192 [ 0.126 , 0.258 ] 0.249 [ 0.140 , 0.355 ] 0.180 [ 0.116 , 0.241 ] 0.397 [ 0.221 , 0.566 ] 0.330 [ 0.171 , 0.466 ] 0.152 [ 0.097 , 0.198 ] 0.143 [ 0.095 , 0.191 ]
Θ Beta 0.8 0.1 0.721 [ 0.648 , 0.793 ] 0.733 [ 0.663 , 0.803 ] 0.729 [ 0.662 , 0.792 ] 0.729 [ 0.661 , 0.802 ] 0.732 [ 0.667 , 0.802 ] 0.730 [ 0.666 , 0.797 ] 0.712 [ 0.644 , 0.785 ] 0.708 [ 0.641 , 0.778 ] 0.716 [ 0.647 , 0.788 ] 0.737 [ 0.670 , 0.804 ] 0.743 [ 0.674 , 0.816 ] 0.749 [ 0.666 , 0.834 ] 0.730 [ 0.654 , 0.812 ]
α Beta 0.3 0.1 0.194 [ 0.150 , 0.236 ] 0.229 [ 0.183 , 0.274 ] 0.279 [ 0.233 , 0.328 ] 0.272 [ 0.220 , 0.317 ] 0.259 [ 0.213 , 0.305 ] 0.262 [ 0.216 , 0.306 ] 0.259 [ 0.216 , 0.302 ] 0.269 [ 0.218 , 0.319 ] 0.254 [ 0.212 , 0.298 ] 0.303 [ 0.246 , 0.358 ] 0.297 [ 0.238 , 0.354 ] 0.265 [ 0.210 , 0.319 ] 0.220 [ 0.172 , 0.267 ]
ρ R Beta 0.5 0.2 0.527 [ 0.421 , 0.646 ] 0.551 [ 0.437 , 0.678 ] 0.456 [ 0.334 , 0.573 ] 0.493 [ 0.371 , 0.609 ] 0.530 [ 0.413 , 0.647 ] 0.558 [ 0.450 , 0.679 ] 0.543 [ 0.416 , 0.655 ] 0.507 [ 0.364 , 0.641 ] 0.481 [ 0.364 , 0.595 ] 0.464 [ 0.362 , 0.568 ] 0.478 [ 0.376 , 0.581 ] 0.563 [ 0.464 , 0.661 ] 0.629 [ 0.555 , 0.706 ]
ρ π Normal 1.5 0.2 1.270 [ 1.035 , 1.496 ] 1.383 [ 1.128 , 1.612 ] 1.433 [ 1.228 , 1.649 ] 1.451 [ 1.228 , 1.669 ] 1.438 [ 1.204 , 1.670 ] 1.456 [ 1.235 , 1.685 ] 1.433 [ 1.202 , 1.672 ] 1.441 [ 1.190 , 1.660 ] 1.439 [ 1.172 , 1.713 ] 1.522 [ 1.325 , 1.736 ] 1.510 [ 1.293 , 1.709 ] 1.629 [ 1.400 , 1.855 ] 1.574 [ 1.296 , 1.825 ]
ρ y Normal 0.1 0.1 0.196 [ 0.144 , 0.248 ] 0.205 [ 0.155 , 0.258 ] 0.200 [ 0.153 , 0.242 ] 0.208 [ 0.163 , 0.259 ] 0.218 [ 0.169 , 0.267 ] 0.223 [ 0.172 , 0.271 ] 0.239 [ 0.190 , 0.287 ] 0.235 [ 0.184 , 0.287 ] 0.245 [ 0.191 , 0.295 ] 0.225 [ 0.180 , 0.270 ] 0.214 [ 0.170 , 0.257 ] 0.165 [ 0.124 , 0.207 ] 0.153 [ 0.114 , 0.191 ]
ρ g Beta 0.6 0.2 0.896 [ 0.844 , 0.946 ] 0.908 [ 0.852 , 0.966 ] 0.934 [ 0.892 , 0.977 ] 0.933 [ 0.888 , 0.977 ] 0.946 [ 0.912 , 0.979 ] 0.942 [ 0.908 , 0.979 ] 0.945 [ 0.911 , 0.981 ] 0.938 [ 0.899 , 0.979 ] 0.952 [ 0.919 , 0.985 ] 0.930 [ 0.890 , 0.974 ] 0.931 [ 0.881 , 0.978 ] 0.929 [ 0.888 , 0.975 ] 0.947 [ 0.916 , 0.979 ]
ρ A Beta 0.2 0.1 0.347 [ 0.156 , 0.531 ] 0.378 [ 0.194 , 0.561 ] 0.209 [ 0.052 , 0.365 ] 0.216 [ 0.043 , 0.375 ] 0.291 [ 0.087 , 0.483 ] 0.283 [ 0.081 , 0.483 ] 0.321 [ 0.122 , 0.514 ] 0.245 [ 0.034 , 0.451 ] 0.453 [ 0.242 , 0.682 ] 0.173 [ 0.037 , 0.301 ] 0.211 [ 0.042 , 0.373 ] 0.215 [ 0.053 , 0.361 ] 0.207 [ 0.041 , 0.354 ]
ρ I Beta 0.6 0.2 0.483 [ 0.311 , 0.655 ] 0.439 [ 0.299 , 0.568 ] 0.443 [ 0.322 , 0.558 ] 0.470 [ 0.323 , 0.610 ] 0.438 [ 0.308 , 0.557 ] 0.442 [ 0.329 , 0.562 ] 0.427 [ 0.317 , 0.538 ] 0.448 [ 0.331 , 0.566 ] 0.409 [ 0.303 , 0.521 ] 0.462 [ 0.315 , 0.602 ] 0.458 [ 0.346 , 0.570 ] 0.631 [ 0.521 , 0.742 ] 0.675 [ 0.570 , 0.776 ]
ρ ι Beta 0.6 0.2 0.961 [ 0.937 , 0.987 ] 0.945 [ 0.917 , 0.973 ] 0.918 [ 0.869 , 0.965 ] 0.918 [ 0.870 , 0.967 ] 0.921 [ 0.877 , 0.971 ] 0.922 [ 0.874 , 0.967 ] 0.927 [ 0.886 , 0.971 ] 0.914 [ 0.865 , 0.967 ] 0.935 [ 0.901 , 0.971 ] 0.922 [ 0.880 , 0.967 ] 0.946 [ 0.915 , 0.983 ] 0.952 [ 0.924 , 0.982 ] 0.933 [ 0.895 , 0.974 ]
σ g Inv-gamma 0.01 4.0 0.0157 [ 0.018 , 0.018 ] 0.013 [ 0.011 , 0.015 ] 0.012 [ 0.010 , 0.014 ] 0.011 [ 0.009 , 0.013 ] 0.011 [ 0.009 , 0.013 ] 0.010 [ 0.008 , 0.012 ] 0.009 [ 0.007 , 0.011 ] 0.009 [ 0.007 , 0.011 ] 0.009 [ 0.008 , 0.011 ] 0.008 [ 0.007 , 0.010 ] 0.008 [ 0.007 , 0.010 ] 0.009 [ 0.007 , 0.010 ] 0.008 [ 0.007 , 0.009 ]
σ A Inv-gamma 0.01 4.0 0.0052 [ 0.007 , 0.007 ] 0.005 [ 0.004 , 0.006 ] 0.002 [ 0.001 , 0.003 ] 0.003 [ 0.001 , 0.005 ] 0.004 [ 0.002 , 0.006 ] 0.004 [ 0.002 , 0.006 ] 0.004 [ 0.003 , 0.005 ] 0.002 [ 0.001 , 0.004 ] 0.004 [ 0.003 , 0.005 ] 0.002 [ 0.001 , 0.002 ] 0.002 [ 0.001 , 0.003 ] 0.004 [ 0.003 , 0.005 ] 0.004 [ 0.003 , 0.005 ]
σ I Inv-gamma 0.01 4.0 0.0505 [ 0.088 , 0.088 ] 0.201 [ 0.029 , 0.335 ] 0.308 [ 0.176 , 0.436 ] 0.282 [ 0.148 , 0.412 ] 0.297 [ 0.162 , 0.425 ] 0.282 [ 0.158 , 0.406 ] 0.259 [ 0.135 , 0.374 ] 0.252 [ 0.138 , 0.375 ] 0.243 [ 0.119 , 0.357 ] 0.161 [ 0.069 , 0.246 ] 0.188 [ 0.095 , 0.278 ] 0.120 [ 0.045 , 0.198 ] 0.101 [ 0.032 , 0.172 ]
σ R Inv-gamma 0.005 4.0 0.0013 [ 0.002 , 0.002 ] 0.002 [ 0.001 , 0.002 ] 0.002 [ 0.001 , 0.002 ] 0.002 [ 0.001 , 0.002 ] 0.002 [ 0.001 , 0.002 ] 0.002 [ 0.001 , 0.002 ] 0.002 [ 0.001 , 0.002 ] 0.002 [ 0.001 , 0.002 ] 0.001 [ 0.001 , 0.002 ] 0.001 [ 0.001 , 0.002 ] 0.001 [ 0.001 , 0.002 ] 0.001 [ 0.001 , 0.001 ] 0.001 [ 0.001 , 0.001 ]
σ ι Inv-gamma 0.005 4.0 0.0062 [ 0.010 , 0.010 ] 0.008 [ 0.005 , 0.012 ] 0.008 [ 0.005 , 0.010 ] 0.008 [ 0.005 , 0.011 ] 0.008 [ 0.005 , 0.012 ] 0.008 [ 0.006 , 0.011 ] 0.007 [ 0.005 , 0.010 ] 0.007 [ 0.004 , 0.009 ] 0.007 [ 0.004 , 0.010 ] 0.006 [ 0.004 , 0.008 ] 0.008 [ 0.004 , 0.011 ] 0.007 [ 0.004 , 0.011 ] 0.005 [ 0.003 , 0.008 ]

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Received: 2017-12-15
Accepted: 2020-05-24
Published Online: 2020-08-03

© 2020 Walter de Gruyter GmbH, Berlin/Boston

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https://doi.org/10.1515/bejm-2017-0266
Keywords for this article
Bayesian vector autoregression; government spending; rule-of-thumb consumers; government spending in utility; tax rule

Articles in the same Issue

  1. Contributions
  2. Quantifying the Effects of Patent Protection on Innovation, Imitation, Growth, and Aggregate Productivity
  3. Sectoral Productivity Gaps and Aggregate Productivity
  4. Optimal Industrial Policies in a Two-Sector-R&D Economy
  5. Entry Costs, Task Variety, and Skill Flexibility: A Simple Theory of (Top) Income Skewness
  6. Leaning-Against-the-Wind: Which Policy and When?
  7. Tax Policy and Toxic Housing Bubbles in China
  8. The Cyclicality of On-the-Job Search Effort
  9. A Test of Neo-Fisherism: 1964–2019
  10. Advances
  11. Evaluating Changes in the Transmission Mechanism of Government Spending Shocks
  12. Contributions
  13. On the Limits of Macroprudential Policy
  14. Robust Monetary Policy Under Uncertainty About the Lower Bound
  15. Monetary Policy and Cross-Border Interbank Market Fragmentation: Lessons from the Crisis
  16. International Welfare Spillovers of National Pension Schemes
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