Governmentally amplified output volatility

Funashima, Yoshito (2015): Governmentally amplified output volatility.

Abstract

Predominant government behavior is decomposed by frequency into several periodic components: updating cycles of infrastructure, Kuznets cycles, fiscal policy over business cycles, and election cycles. Little is known, however, about the theoretical impact of such cyclical behavior in public finance on output fluctuations. Based on a standard neoclassical growth model, this study intends to examine the frequency at which public investment cycles are relevant to output fluctuations. We find an inverted U-shaped relationship between output volatility and length of cycle in public investment. Moreover, with a numerical setting, we show that periodic behavior in public investment at low frequencies—such as updating cycles of infrastructure and Kuznets cycles—can cause aggravated output resonance.

• Item Type: MPRA Paper
• Language: English
• Keywords: Output volatility; Public investment; Resonance; Frequency
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

References

Abrams, B. and P. Iossifov, 2006. Does the Fed contribute to a political business cycle? Public Choice 129, 249-262.

Afonso, A. and J. T. Jalles, 2013. The cyclicality of education, health, and social security government spending. Applied Economics Letters 20, 669-672.

Alesina, A. and N. Roubini, 1992. Political cycles in OECD economies. Review of Economic Studies 59, 663-688.

Alesina, A., G. Cohen, and N. Roubini, 1992. Macroeconomic policy and elections in OECD democracies. Economics & Politics 4, 1-30.

Alesina, A., N. Roubini, and G. Cohen, 1997. Political cycles and the macroeconomy. Cambridge: MIT Press.

Aschauer, D. A., 1989. Is public expenditure productive? Journal of Monetary Economics 23, 177-200.

Barro, R. J., 1990. Government spending in a simple endogenous growth model. Journal of Political Economy 98, S103-S125.

Barro, R. J. and X. Sala-i-Martin, 2004. Economic growth. Cambridge: MIT Press.

Baxter, M. and R. G. King, 1999. Measuring business cycles: Approximate band-pass filters for economic time series. Review of Economics and Statistics 81, 575-593.

Cassou, S. P. and K. J. Lansing, 1998. Optimal fiscal policy, public capital, and the productivity slowdown. Journal of Economic Dynamics & Control 22, 911-935.

Christiano, L. J. and T. J. Fitzgerald, 2003. The band pass filter. International Economic Review 44, 435-465.

Fisher, W. H. and S. J. Turnovsky, 1998. Public investment, congestion, and private capital accumulation. Economic Journal 108, 339-413.

Funashima, Y., 2013. Reassessing the Fed’s behaviour towards presidential elections. Applied Economics Letters 20, 795-798.

Futagami, K., Y. Morita, and A. Shibata, 1993. Dynamic analysis of an endogenous growth model with public capital. Scandinavian Journal of Economics 95, 607-625.

Hamilton, J. D., 1994. Time series analysis. Princeton University Press.

Hansen, A. H., 1941. Fiscal policy and business cycles. New York: Norton.

Hibbs, D., 1977. Political parties and macroeconomic policy. American Political Science Review 71, 1467-1487.

Hines, J. R., 2010. State fiscal policies and transitory income fluctuations. Brookings Papers on Economic Activity 2010 , 313-337.

Ito, T., 1990. The timing of elections and political business cycles in Japan. Journal of Asian Economics 1, 135-156.

Ito, T. and J. H. Park, 1988. Political business cycles in the parliamentary system. Economics Letters 27, 233-238.

Lane, P. R., 2003. The cyclical behavior of fiscal policy: Evidence from the OECD. Journal of Public Economics 87, 2661-2675.

Marrero, G. A., 2008. Revisiting the optimal stationary public investment policy in endogenous growth economies. Macroeconomic Dynamics 12, 172-194.

Milani, F., 2010. Political business cycles in the new Keynesian model. Economic Inquiry 48, 896-915.

Nordhaus, W. D., 1975. The political business cycle. Review of Economic Studies 42, 169-190.

Ramsey, F. P., 1928. A mathematical theory of saving. Economic Journal 38, 543-59.

Sorensen, B. E., L. Wu, L., and O. Yosha, 2001. Output fluctuations and fiscal policy: U.S. state and local governments 1978-1994. European Economic Review 45, 1271-1310.

Turnovsky, S. J., 2004. The transitional dynamics of fiscal policy: longLong -run capital accumulation and growth. Journal of Money, Credit and Banking 36, 883-910.

Turnovsky, S. J. and W. H. Fisher, 1995. The composition of government expenditure and its consequence for macroeconomic performance. Journal of Economic Dynamics & Control 19, 747-786.