Composition of Public Expenditure and Government Production in a DSGE Model

This dissertation systematically examines the macroeconomic effects of various types of government expenditures, including the government employment, government consumption, and government investment, within a unified New-Keynesian DSGE model. A novel feature of this exploration is to consider a government production sector in which the government not only purchases goods from the private sector, but also hires labor from households in order to directly produce government output. This novelty is consistent with the National Income and Product Accounts in the sense that like a producer in the private sector, the government hires labor and accumulates capital and the value added of government production directly contributes to the economy-wide output. Thus, GDP is the sum of private output and the value added of the government production. In addition, to fill the gap in the literature, we shed light on the importance of wage rigidities, which are have insightful implications for the evaluation of policy effectiveness of government spending. This study indicates that there are, at least, five effects in governing the impacts of government spending -- the wealth effect, the demand-enhancing effect, the reallocation effect, the productivity effect and the intertemporal substitution effect. Per these five effects, the relationships between business cyclicity and government spending are also examined. Specifically, we shows that the impacts of government spending not only depend on the variety of government expenditure component and government spending share of purchases from the private sector, but also are responsive to market frictions (wage and price rigidities), market markups (price and wage markups), and the fraction of non-Ricardian agents. By means of a more sophisticated New Keynesian DSGE model, we not only explain why our results different from the existing studies, but also provide a more empirically convincing prediction to the policymakers and macroeconomists.