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The Changing Structure of Government Consumption Spending
1 : Banco de España
Advanced economies experience a secular increase in the share of purchases from the private sector in government consumption spending: over time governments purchase relatively more private-sector goods, and rely less on the own production of value added. We build a general equilibrium model to show that this process can be accounted for by investment-specific technological change. We use the model to measure the effect of this process on the transmission of fiscal policy, finding: (i) a shift in the stimulus effects of government spending shocks towards private economic activity and (ii) a dampened response of hours, but not of output.
