Government Purchases Research Articles

A Simple Aggregate Demand Analysis With Dynamic Optimization in a Small Open Economy

We develop an aggregate demand analysis of a small open economy based on all agents’ dynamic optimization. Murota and Ono (2015) present a simple Keynesian cross analysis with dynamic optimization. This paper extends it to a small-country setting with two factors and two commodities, of which the structure is as simple as the conventional Keynesian cross analysis. We apply the model to examine the effects of changes in various parameters, such as the terms of trade, foreign asset holdings and government purchases, on aggregate demand. They are quite different from those under full employment and those of the Mundell-Fleming model.

Taking off into the Wind: Unemployment Risk and State-Dependent Government Spending Multipliers

We propose a model with involuntary unemployment, incomplete markets, and nominal rigidity, in which the effects of government spending are state-dependent. An increase in government purchases raises aggregate demand, tightens the labor market and reduces unemployment. This in turn lowers unemployment risk and thus precautionary saving, leading to a larger response of private consumption than in a model with perfect insurance. The output multiplier is further amplified through a composition effect, as the fraction of high-consumption households in total population increases in response to the spending shock. These features, along with the matching frictions in the labor market, generate significantly larger multipliers in recessions than in expansions. As the pool of job seekers is larger during downturns than during expansions, the concavity of the job-finding probability with respect to market tightness implies that an increase in government spending reduces unemployment risk more in the former case than in the latter, giving rise to countercyclical multipliers.

Fiscal Consolidation and Public Wages

A New Keynesian model with government production, public compensation, and unemployment is fit to U.S. data to study the macroeconomic and fiscal effects of public wage reductions. We find that accounting for the type of government spending is crucial for its macroeconomic implications. Although reductions in public wages and government purchases of goods have similar effects on total output and the fiscal balance, the former can raise private output slightly, in contrast to the substantial contractionary effects of the latter. In addition, the baseline estimation finds that exogenous public wage reductions decrease private wages. Model counterfactuals show that sufficiently rigid nominal private wages can reverse the response of private wages, as the rigidity dampens the labor reallocation effect from the public to private sector that exerts downward pressure on private wages.

The Changing Structure of Government Consumption Spending

We document a secular increase in the share of purchases from the private sector in government consumption spending: over time the government purchases relatively more private-sector goods, and relies less on its own production of value added. We build a general equilibrium model in which investment-specific technological change accounts for the changing structure of government spending. The model predicts that this secular process alters the transmission of government spending shocks by raising the response of private value added, while dampening the response of hours. We validate these results with novel empirical evidence on the effects of government spending across countries.

Análise do processo de aquisição de medicamentos: um estudo de caso na Prefeitura Municipal de Manaus

A gestão das compras governamentais é um tema que assume um papel de destaque no cotidiano dos gestores públicos brasileiros. Ao mesmo tempo, representa um desafio por questões relacionadas aos aspectos legais, eficiência e eficácia administrativa. O objetivo geral do artigo é avaliar o gasto com a aquisição de medicamentos por meio de atas de registro de preços, no âmbito da Secretaria Municipal de Saúde de Manaus, tendo como recorte temporal os exercícios orçamentários dos anos de 2013 a 2015. Para tanto, foi realizado um estudo de caso de natureza exploratória. Os dados foram coletados por meio de pesquisa documental junto ao Sistema de Protocolo da secretaria, foram categorizados e geraram um banco de dados que possibilitou a análise dos processos de aquisição de medicamentos. Os resultados da pesquisa indicam que o investimento na aquisição de medicamentos independe da dotação orçamentária e a eficiência do processo de compras de medicamentos está associada à gestão da cadeia de todo o processo de aquisição.

The effects of government spending on real exchange rates: Evidence from military spending panel data

Using panel data on military spending for 125 countries, we document new facts about the effects of changes in government purchases on the real exchange rate, consumption, and current accounts in both advanced and developing countries. While an increase in government purchases causes real exchange rates to appreciate and increases consumption significantly in developing countries, it causes real exchange rates to depreciate and decreases consumption in advanced countries. The current account decreases in both groups of countries. These findings are not consistent with standard international business cycle models. We discuss potential sources of the differences between advanced and developing countries in the responses to spending shocks.

The Economic Impact of Government Purchases on the Price Volatility of Korean Dried Red Pepper

The Economic Impact of Government Purchases on the Price Volatility of Korean Dried Red Pepper

Filling arms production data gaps: South America as a case in point

In this article I argue that the data collection methods and procedures behind the Stockholm International Peace Research Institute’s (SIPRI) global arms trade database can also be used to approximate domestic purchases of local production of major conventional arms. The total output of domestic arms industries would then be the sum of what is domestically retained (procured) plus arms exports, if any. The feasibility of this idea is tested by presenting new data on domestic arms production for five South American countries (Argentina, Brazil, Chile, Colombia, and Venezuela) between 1960 and 2015. The results show the critical role government purchases play in maintaining domestic arms industries.

SOVEREIGN DEBT IN THE UNITED STATES AND GROWTH EXPECTATIONS

This paper shows empirical evidence and theory consistent with the US government using debt optimally to adjust the federal budget to news about long-term growth. First, using historical forecasts from the Congressional Budget Office (CBO) since 1984, I find that government purchases and deficits are positively correlated with expectations about long-term productivity, real gross domestic product, and tax revenue growth, whereas tax receipts are negatively correlated. A structural vector autoregression estimated with US quarterly data in 1955–2015 identifies permanent and transitory productivity shocks and points to “trend” shocks as the source of these correlations. Second, I present an open economy real business-cycle model with stochastic productivity trend and optimal public purchases and taxes. Calibrating the model to the US economy, the Ramsey planners' allocation yields moments aligned with those observed in the data.

How Does Distress Acquisition Incentivized by Government Purchases of Distressed Loans Affect Bank Default Risk?

The topic of bank default risk in connection with government bailouts has recently attracted a great deal of attention. In this paper, the question of how a bank’s default risk is affected by a distress acquisition is investigated. Specifically, the government provides a bailout program of distressed loan purchases for a strong bank to acquire a bank in distress. The acquirer bank may likely refuse the acquisition with a bailout when the amount of distressed loan purchases is large or the knock-out value of the acquired bank is high. When the acquirer bank realizes acquisition gains, the default risk in the consolidated bank’s equity return is negatively related to loan purchases, but positively to the knock-out value of the acquired bank. The government bailout, as such, in large part contributes to banking stability.

Private debt overhang and the government spending multiplier: Evidence for the United States

SummaryUsing state‐dependent local projections and historical US data, we find that government spending multipliers are considerably larger in periods of private debt overhang. In particular, while multipliers are below or close to one in low private debt states, we find significant crowding‐in of private spending in periods of debt overhang, resulting in multipliers that are much larger than one. In high private debt episodes, more government purchases even reduce the ratio of government debt to gross domestic product. These results are robust for the type of shocks, and when we control for the business cycle, financial crises, deleveraging episodes, government debt overhang, and the zero‐lower‐bound.

Crowding-out (or -in) effect in transition economies: Kyrgyzstan case

PurposeThe crowding-out and crowding-in effects have been at the core of arguments among economists regarding the influence of government spending on private investment. This study aims to examine the crowding-out (or -in) effect of public spending on private investment in the transition economy of Kyrgyzstan.Design/methodology/approachThe empirical model is an autoregressive distributed lag (ARDL) and the vector autoregression approach (VAR). Monthly data from 2005 to 2013 of the private investment, government expenditures, remittances from abroad and broad money data were used in the empirical analysis.FindingsThe authors found that an increase in government purchases leads to rise in private investment. More precisely, the public spending crowds-in private investment at the speed with 2.06 months. On the other hand, despite the fact that remittances to GDP ratio has reached to almost 30 per cent, there is no any statistically significant effect between these variables. On the contrary, it was revealed that the broad money has statistically significant, affirmative effect on private investment. Furthermore, findings of the VAR model support the results of ARDL. The variance decomposition demonstrates that private investment shock accounts for 58.16 per cent in government expenditures, 11 per cent in broad money and 5 per cent in remittances.Originality/valueThe results of the study allow policymakers to demonstrate that the growth of national economy of the Kyrgyz Republic may be encouraged by expanding public investment with external source assistance such as grants and international loans. Accordingly, efficient use of those external funds is one of the suggested ways for economic development. Nevertheless, expansionary monetary and fiscal policy may be beneficial for economic growth in Kyrgyzstan.

P-E3 Assessment of internationally-available HIV test kits for their suitability to meet manufacturers' claims

Background: HIV test kits, particularly rapid HIV tests, are used throughout the world as a primary measure to protect the blood supply and provide diagnosis to save lives. The US government purchases large numbers of HIV tests at considerable expense, and expects them to perform adequately. Objective: To assess a large number and variety of HIV test kits to determine if they meet the claims of the manufacturers. Methods: From September 2010 through July 2017, a total of 1,123 lots of HIV test kits from 14 manufacturers and representing 11 different tests from 26 countries, were received for evaluation at the INSTITUTE OF HUMAN VIROLOGY. Each test kit was assessed for performance characteristics using panels of sera (n=30 or 160) that included positives for HIV-1 and HIV-2 (n=8 or 80), and negatives (n=22 or 80). Several HIV-1 positive samples were weak positives derived from seroconversion panels (SeraCare). Test kits were also assessed for precision using several HIV-1 weak positive samples tested in replicate. Results: Of the HIV test kit lots evaluated, 99.2% successfully passed the evaluation with perfect performance. Of the 9 lots that did not pass, 3 were found to produce high background that interfered with reading, 2 performed inadequately with high-temperature testing, and 4 exhibited greater than one false-positive result. In one assessment, a country had reported poor performance of a test kit, but the test kit passed the evaluation; this resulted in a visit to the country to assess the laboratory's activities. Conclusion: In our evaluation of a large number and variety of HIV test kit lots from 14 manufacturers, nearly all performed as expected and met the manufacturers' claims.

Fiscal policy interventions at the zero lower bound

We build on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to explore the macroeconomic consequences of fiscal expansionary shocks during the economic crisis of 2008 in the eurozone. In this setting, we find that the big four eurozone economies (France, Germany, Italy, and Spain) can effectively escape from their liquidity trap through fiscal policy interventions caused by government purchases. We estimate the government spending multiplier to be above 1.8 when this policy is associated with a long-term commitment to keeping the nominal interest rate at the zero lower bound, as suggested by Krugman (1998). Notably, the short-term deficit effect on the budget balance can be offset five years after the implementation of a large spending program. We also show that alternative policies with tax cuts that expand the supply do not appear to have the same power in the short run. Moreover, we provide novel empirical evidence that a large government debt renders a government spending policy ineffective.

The Effectiveness of the European Union in Safeguarding Competition in Public Procurement Markets

The EU’s single market in government purchases constitutes a fundamental pillar of economic integration throughout the continent, as it amounts to 4% of GDP. If competition is deficient efficiency losses ensue. As we know surprisingly little about the effectiveness of monitoring and enforcement institutions designed to safeguard competition, we investigate whether the European Commission and the Court of Justice of the European Union are effective in changing market behaviour. Using a unique micro-level public procurement database of over 3.7 million contracts linked to all relevant legal decisions from 2009-2014, we investigate two distinct causal mechanisms: i) requiring a change in national public procurement legislation; and ii) striking down anticompetitive practices while leaving legislation unchanged. Theoretically, it is unclear whether any of these interventions would result in a lasting improvement in competitive outcomes such as the number of bidders, supplier composition, and discounts offered, as well as in public sector tender design such as procedure types or open advertisement. Using matched samples difference-in-differences estimation, we find that requiring legislative change has a significant and sizable positive impact on market openness: it increases the number of bidders (1.8-3%), lowers the incidence of single bidding (3-4%), decreases the market share of local winners (3-4%), and lowers prices (0.4-0.6%). Requiring change in anticompetitive practices has no discernible impact. The policy implications are profound, in order to improve the EU-wide single market of government purchases, better monitoring and stronger supranational legal action are needed.

Optimal Fiscal Policy with Utility-Enhancing Government Spending, Consumption Taxation and a Common Income Tax Rate: The Case of Bulgaria

Abstract This paper explores the effects of fiscal policy in an economy based on indirect taxes, and one that is constrained to taxing all (labor and capital) income at the same rate. The focus of the paper is on the relative importance of consumption vs. income taxation, as well as on the provision of utility-enhancing public services. To this end, a Real-Business-Cycle model, calibrated to Bulgarian data (1999–2014), was set up with a richer public finance side. Bulgarian economy was chosen as a case study due to its major dependence on consumption taxation as a source of tax revenue. To illustrate the effects of fiscal policy, two regimes were compared and contrasted to one another - exogenous vs. optimal (Ramsey) policy case. The main findings from the computational experiments performed are: (i) The optimal steady-state (capital and labor income) tax rate is zero, as it is the most distortionary tax to use; (ii) The optimal steady-state consumption tax (the only source of revenue) has to almost double to finance the optimally-set level of government purchases.

Government As Customer of Last Resort: The Stabilizing Effects of Government Purchases on Firms

I document a beneficial effect of the government’s participation in product markets. Exploiting the 2008-09 financial crisis as a natural experiment, I show that federal procurement contracts insulate government contractors’ performance from the crisis. By 2009, government contractors had 19% higher market capitalization, 21% higher capital expenditures, and received 24% more bank credit than otherwise similar firms. This stabilizing effect, in turn, spills over onto neighboring firms. An average amount of government purchases reduces local employment losses by 35% in retail industries and by 48% in industries supplying government contractors. The spillovers are particularly strong in high economic slack areas.

Do Government Purchases Affect Unemployment?

AbstractWe estimate the effect of government purchases on unemployment in 20 OECD countries, for the period 1980–2007. An increase in government purchases, equal to 1 percent of GDP, is found to reduce unemployment by about 0.3 percentage points in the same year. The effect is greater and more persistent under less “employment‐friendly” labour‐market institutions, and it is greater and more persistent under a fixed exchange rate regime than under a floating regime. The effect is also greater in downturns than in booms. The effect on unemployment reflects a corresponding positive effect of increased government purchases on the employment‐to‐population rate.

DO PUBLIC AND PRIVATE DEBT LEVELS AFFECT THE SIZE OF FISCAL MULTIPLIERS?

This paper investigates the effectiveness of fiscal policies – as measured by the impact and cumulative multipliers – and how they interact with public and private debt. Harnessing the moderated panel regression approach, based on the yearly data set of several economies during the period from 1996 to 2012, the analysis is focused on the impact of spending-and-revenue-based fiscal policies on economic growth and how these fiscal instruments interact with public and private indebtedness. The result of spending stimuli advocates the basic Keynesian theory. An increase in public expenditures contemporaneously generates a positive multiplier, of around 0.29 – 0.44 and around 0.45 – 0.58 during two years. Decomposing the expenditures into their elements, this paper documents a stronger impact from public investment than that from government purchases. On the other hand, the revenue stimuli seem to follow the Ricardian Equivalence Hypothesis (REH), arguing that current tax cuts are inconsequential. The impact and cumulative multipliers for this fiscal instrument have mixed results, ranging from -0.21 to 0.05 and -0.26 to 0.06, respectively. Moreover, no robust evidence is found to support the argument that government debt moderates the effectiveness of fiscal policies. The size of the multipliers for both spending and revenue policies remain constant with the level of public debt. On the other hand, private debt appears to show a statistically significant moderating effect on spending stimuli. Its impact on spending multipliers, however, is economically insignificant. The moderation effect of private debt on the revenue stimuli does not seem to exist. Finally, this paper documents that both public and private debt exhibit a negative and statistically significant estimation for economic output.

Monetary Policy Choice in Developing Countries: A Multinomial Probit Model

The Asian crisis of the 1990s brought into question the adequacy of soft pegs for developing countries. The alternatives suggested by the literature are fixed exchange rates and inflation targeting. This study uses data for 142 developing countries whose monetary policies are classified into three mutually exclusive categories: fixed exchange rates (or hard pegs), inflation targeters, and the reference group (soft pegs). Since the dependent variable is unordered and categorical, a multinomial probit model of monetary policy choice is estimated, in which each country chooses from the three monetary policies the one that provides the highest utility. The multinomial probit model is a choice probability model that allows the three choices to be evaluated simultaneously: based on independent variables that represent country characteristics such as openness to trade, vulnerability to external shocks, fiscal dominance and central bank characteristics, the model reports two sets of results - the log of the ratio of the probability for a country to choose inflation targeting relative to soft pegs, and the log of the ratio of the probability for a country to choose fixed exchange rates relative to the reference choice. The study finds that relative to soft pegs, inflation targeters are less open to trade, are more developed, have more diversified exports and have more independent central banks (as reported by the presence of both lower turnover rates for Central Bank governors and tighter restrictions on government borrowing to finance the budget deficit). Countries with fixed exchange rates are more developed and their central banks have less actual independence than those in the reference group. After accounting for the above country characteristics, the results suggest that fiscal dominance (proxied by variables such as government consumption expenditure, central government debt, share of government purchases and cash surplus/deficit, all expressed as percentage of real GDP) does not play a role in the choice of monetary policy. Average inflation rates were also added to the previous estimations, and the inflation coefficients did not attain statistical significance in any of the specifications suggesting that inflation levels do not influence the choice of monetary policy.