The Structure of Government Spending and the Business Cycle

Grechyna, Daryna (2016): The Structure of Government Spending and the Business Cycle.

Abstract

We explore the role of the composition of government spending for the cyclical properties of fiscal variables and for the volatility of the business cycles. In the U.S., the fraction of mandatory spending in total government outlays increased from around 0.40 to 0.60 during the last 50 years, while the share of total government outlays in national output stayed relatively constant during this period. We distinguish mandatory and discretionary public spending in a standard model of optimal fiscal policy and show that the composition of government spending is able to explain a fraction of the reduction in output volatility during the Great Moderation and an increase in the countercyclicality of fiscal policy in the U.S. This is another argument in support of the "rules-based" fiscal policy rather than fiscal discretion.

• Item Type: MPRA Paper
• Language: English
• Keywords: optimal fiscal policy, mandatory and discretionary public spending, volatility, business cycles.
• 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; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods

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