Title: Cyclical Government Spending : Theory and Empirics
I provide a thorough analysis of the presence of a systematic response
of government spending to the cycle in a simple New Keynesian model. I
show that it has important implications for the transmission of monetary
policy. I then use the gap between OLS and 2SLS government spending
multipliers to estimate how cyclical the systematic part of government
spending is. I use a GMM method for estimation and show that it
is quick, simple and fares better than usual alternatives. I estimate that
when unemployment decreases by 1%, the systematic component of government
spending increases by 0.23%. Additional results suggests that
government spending multipliers reported in the literature slightly overestimate
the true impact multiplier and are larger than medium-run cumulative
ones.