Essays on government spending and the business cycle

Juan F Guerra-Salas, Fordham University


Government expenditure interacts with the business cycle. This dissertation includes three essays that explore issues fundamentally related to that interaction. The first essay focuses on oil-exporting countries and argues that government investment of oil revenue, if not adequately smoothed over time, can propagate oil price shocks and exacerbate the business cycle. When government investment is positively correlated with oil revenue, it propagates positive oil price shocks through a productivity-enhancing channel: by increasing public capital, which serves as an input in private production, the government raises the marginal productivity of labor and private capital, triggering an expansion. The second essay argues that procyclical fiscal policy during an economic expansion may contribute to a decrease in the skill premium—the gap between wages of high-skilled and low-skilled workers. This occurs if a boom is concentrated on nontradable activities that are intensive in low-skilled labor, since procyclical policy exacerbates the effects of the shock. I use this framework to rationalize the decline in income inequality within most Latin American countries in the last 10-15 years. The first two essays focus mainly on the way that different fiscal policy rules affect the macroeconomy, whereas the third and final essay in this dissertation explores how the spending side of fiscal policy responds to the business cycle. I find that government spending is forward-looking in a number of countries, in the sense that it reacts to forecasts of economic activity rather than to past economic realizations. I also study whether the response of government spending is countercyclical or procyclical. General equilibrium models are the main methodological devices I use in this dissertation. The first two essays feature small open economy dynamic stochastic models that facilitate the analysis of alternative fiscal policy rules. I also use other methods, such as structural vector autoregressions to measure the dynamic effects of oil price shocks (first essay), and the generalized method of moments to identify the response of government spending to the business cycle (third essay).

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Recommended Citation

Guerra-Salas, Juan F, "Essays on government spending and the business cycle" (2015). ETD Collection for Fordham University. AAI3715367.