Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153229
Authors: 
Straub, Roland
Tchakarov, Ivan
Year of Publication: 
2007
Series/Report no.: 
ECB Working Paper 795
Abstract: 
Despite intense calls for safeguarding public investment in Europe, public investment expenditure, when measured in relation to GDP, has steadily fallen in the last three decades, evoking fears that economic activity may be correspondingly negatively affected. At the same time, however, public consumption in the EU-12 countries has trended up. In this paper, we provide a macroeconomic assessment of the observed change in the composition of public spending in the euro area in a medium-scale two-country dynamic stochastic general equilibrium (DSGE) model. First, we analyze the channels through which, both temporary and permanent public investment shocks generate larger fiscal multipliers than exogenous increases in public consumption. Furthermore, we quantify the negative impact of a change in fiscal stance, characterized by a permanent rise in public consumption and a permanent fall in public investment, keeping thereby the overall level of public spending constant. The key message of the paper is that calls for reversing the observed trend in the composition of public spending are well justifed.
Subjects: 
DSGE models
euro area
Public consumption
Public investment
JEL: 
F41
F42
Document Type: 
Working Paper

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