Our empirical analysis is based on a structural vector error correction (SVEC) model using UK quarterly non-interpolated data (1981:Q1 -2007:Q4). At the moment the evidence on this country is scarce, as only few studies have employed UK data (Perotti 2004 and 2007, Ramos and Roca-Sagales 2008, Monacelli and Perotti 2010). Our results show that shocks to aggregate public spending negatively affect private consumption, even if the estimates are barely statistically different from zero at standard levels. Looking at the effects of the three components of public spending, we find that shocks to both net social security transfers and government “pure” consumption (purchases of goods and services) result in positive responses of private consumption. While the response to the first shock lasts four years, the response to the second shock dies out within six quarters. On the other hand, shocks to public wages negatively affect private consumption, with effects that die out less than two years after the shock. These results support the intuition that using total government spending does not seem to be a reasonable simplification when studying the effects of public spending on private consumption.
73rd International Atlantic Economic Conference
March 28 - 31, 2012 | Istanbul, Turkey
Consumption multipliers of different public spending types: A SVEC analysis for the U.K
Saturday, 31 March 2012: 2:35 PM
At the beginning of 2009, when the need to implement an unprecedented increase in public spending to counteract the global recession became clear, a common question among policy makers and Treasury Departments all over the world was the following: which part of public expenditure should we privilege in order to maximize the positive effect on private demand? Two years later, as the agenda is dominated by the need of fiscal retrenchment, the question is reversed: what should be cut first in order not to dampen the recovery? In both cases, the issue to be addressed is the same: finding the public expenditure category associated with the highest consumption multiplier. Attempts to evaluate the effectiveness of fiscal policy often rely on the appraisal of the sign and magnitude of public expenditure’s impact either on GDP (e.g. Blanchard and Perotti 2002), or private consumption (e.g. García and Ramajo 2005), or on private investment (e.g. Wang 2005). In our paper we investigate the private consumption multiplier associated not only with aggregate government spending, but also with each of its three different components, namely wage, non-wage and social security expenditures. These three spending categories differ in many respects, so it is reasonably plausible to hypothesize different qualitative and quantitative impacts on private consumption. The fundamental motivation of our work is the belief that a focus on the aggregate measure of public spending, rather than on a more accurate disaggregation, might imply inaccurate policy conclusions on its stimulating role (if any). Particularly, we explicitly consider government social expenditure as a spending category per se, rather than including it into the revenue component as usually done in the literature. The rationale for that relies in our desire to verify the consumption-enhancing properties of income redistribution, which is implemented through the net social security transfers.
Saturday, 31 March 2012: 2:35 PM
At the beginning of 2009, when the need to implement an unprecedented increase in public spending to counteract the global recession became clear, a common question among policy makers and Treasury Departments all over the world was the following: which part of public expenditure should we privilege in order to maximize the positive effect on private demand? Two years later, as the agenda is dominated by the need of fiscal retrenchment, the question is reversed: what should be cut first in order not to dampen the recovery? In both cases, the issue to be addressed is the same: finding the public expenditure category associated with the highest consumption multiplier. Attempts to evaluate the effectiveness of fiscal policy often rely on the appraisal of the sign and magnitude of public expenditure’s impact either on GDP (e.g. Blanchard and Perotti 2002), or private consumption (e.g. García and Ramajo 2005), or on private investment (e.g. Wang 2005). In our paper we investigate the private consumption multiplier associated not only with aggregate government spending, but also with each of its three different components, namely wage, non-wage and social security expenditures. These three spending categories differ in many respects, so it is reasonably plausible to hypothesize different qualitative and quantitative impacts on private consumption. The fundamental motivation of our work is the belief that a focus on the aggregate measure of public spending, rather than on a more accurate disaggregation, might imply inaccurate policy conclusions on its stimulating role (if any). Particularly, we explicitly consider government social expenditure as a spending category per se, rather than including it into the revenue component as usually done in the literature. The rationale for that relies in our desire to verify the consumption-enhancing properties of income redistribution, which is implemented through the net social security transfers.