THE CHANGING STRUCTURE OF GOVERNMENT CONSUMPTION SPENDING

Abstract

AbstractWe document a secular change in the structure of government consumption spending: Over time the government purchases relatively more private‐sector goods, and relies less on its own production of value added. This process alters the transmission of fiscal policy, by dampening the response of hours, public value added, and the labor share to government spending shocks, while leaving the response of total output unchanged. We rationalize these facts in a general equilibrium model where a decline of the public‐sector relative productivity drives the changing structure of government spending, which in turn modifies the transmission mechanism of government spending shocks.