NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Government Spending and Private Activity

Valerie A. Ramey

NBER Working Paper No. 17787
Issued in January 2012
NBER Program(s):   EFG   ME

This paper asks whether increases in government spending stimulate private activity. The first part of the paper studies private spending. Using a variety of identification methods and samples, I find that in most cases private spending falls significantly in response to an increase in government spending. These results imply that the average GDP multiplier lies below unity. In order to determine whether concurrent increases in tax rates dampen the spending multiplier, I use two different methods to adjust for tax effects. Neither method suggests significant effects of current tax rate changes on the spending multiplier. In the second part of the paper, I explore the effects of government spending on labor markets. I find that increases in government spending lower unemployment. Most specifications and samples imply, however, that virtually all of the effect is through an increase in government employment, not private employment. I thus conclude that on balance government spending does not appear to stimulate private activity.

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Document Object Identifier (DOI): 10.3386/w17787

Published: Government Spending and Private Activity, Valerie A. Ramey. in Fiscal Policy after the Financial Crisis, Alesina and Giavazzi. 2013

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