Industry Evidence on the Effects of Government Spending

Instrumental-Variables Regressions of Markups on Government Demand


This paper investigates the effects of government purchases at the industry level in order to shed light on the transmission mechanism for government spending on the aggregate economy. We create a new panel dataset that matches output and labor variables to industry-specific shifts in government demand. An increase in government demand raises output and hours, lowers real product wages and labor productivity, and has no effect on the markup. The estimates also imply approximately constant returns to scale. The findings are more consistent with the effects of government spending in the neoclassical model than the textbook New Keynesian model.

American Economic Journal: Macroeconomics, vol. 3, no. 1, January 2011, pp. 36–59

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Christopher J. Nekarda
Christopher J. Nekarda
Principal Economist

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Valerie A. Ramey
Valerie A. Ramey
Professor of Economics