Public Spending Management and Macroeconomic Interdependence

June 1, 2004

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Giovanni Ganelli. Public Spending Management and Macroeconomic Interdependence, (USA: International Monetary Fund, 2004) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies, in the context of a New Open Economy Macroeconomics (NOEM) model, the effects of "public competition policies" aimed at improving the efficiency of public spending. Such measures are modeled as an increase in the price elasticity of public consumption. The paper finds that public competition policies significantly affect macroeconomic interdependence across countries. Following a domestic fiscal expansion, an higher public price elasticity increases the substitutability between goods purchased by the domestic and the foreign governments. The same exchange rate variation can therefore sustain larger shifts in relative demand for goods. The expenditure-switching effect is magnified, implying a larger change in relative output. In welfare terms, countries with a larger government sector have an incentive to promote public competition policies.

Subject: Consumption, Exchange rates, Expenditure, External position, Foreign assets, Foreign exchange, National accounts, Private consumption

Keywords: Consumption, Consumption index, Efficiency-enhancing measure, Euler equation, Exchange rate, Exchange rates, Expenditure-switching effect, Foreign assets, Global, Government spending, Macroeconomic interdependence, Money demand equation, NOEM, NOEM model, Private consumption, Public competition policies, Utility function, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/102
Stock No:

WPIEA1022004
ISBN:

9781451852646
ISSN:

1018-5941

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