Quantitative Economics
Journal Of The Econometric Society
Edited by: Stéphane Bonhomme • Print ISSN: 1759-7323 • Online ISSN: 1759-7331
Quantitative Economics: Nov, 2013, Volume 4, Issue 3
Public consumption over the business cycle
Rüdiger Bachmann, Jinhui H. Bai
What fraction of the business cycle volatility of government purchases is ac-
counted for as endogenous reactions to overall macroeconomic conditions? We
answer this question in the framework of a neoclassical representative household
model where the provision of a public consumption good is decided upon en-
dogenously and in a time-consistent fashion. A simple version of such a model
with aggregate productivity as the sole driving force fails to match important fea-
tures of the business cycle dynamics of public consumption, which comes out as
not as volatile and persistent as in the data and too synchronized with the cycle.
We add implementation lags and implementation costs in the budgeting process
to the model, plus taste shocks for public consumption relative to private con-
sumption, and achieve a better fit to the data. All these ingredients are essential
to improve the fit. In our baseline specification 50% of the variance of public con-
sumption is driven by aggregate productivity shocks.
Keywords. Public consumption, aggregate productivity shocks, business cycles,
implementation lags, implementation costs, taste shocks, time-consistent public
policy.
JEL classification. E30, E32, E60, E62, H30.
counted for as endogenous reactions to overall macroeconomic conditions? We
answer this question in the framework of a neoclassical representative household
model where the provision of a public consumption good is decided upon en-
dogenously and in a time-consistent fashion. A simple version of such a model
with aggregate productivity as the sole driving force fails to match important fea-
tures of the business cycle dynamics of public consumption, which comes out as
not as volatile and persistent as in the data and too synchronized with the cycle.
We add implementation lags and implementation costs in the budgeting process
to the model, plus taste shocks for public consumption relative to private con-
sumption, and achieve a better fit to the data. All these ingredients are essential
to improve the fit. In our baseline specification 50% of the variance of public con-
sumption is driven by aggregate productivity shocks.
Keywords. Public consumption, aggregate productivity shocks, business cycles,
implementation lags, implementation costs, taste shocks, time-consistent public
policy.
JEL classification. E30, E32, E60, E62, H30.
Supplemental Material
Journal News
March 5, 2024
Announcing the New Journal Editors
The terms of the Editors of the Econometric Society's three journals end June 30, 2025. We are pleased to announce the incoming Editors and to thank the outgoing Editors for their excellent and continuing service.
Econometrica: Since 2019, Guido Imbens has served as the 14th Editor of Econometrica. On July 1, 2025, Marina Halac will become the Editor.
Quantitative Economics: Stéphane Bonhomme has been the Editor of Quantitative Economics since 2021. His successor will be Bernard Salanié.
Theoretical Economics: The Editor of Theoretical Economics since 2021 has been Simon Board. Taking over for him in July 2025 will be Federico Echenique.
Guido, Stéphane, and Simon have been outstanding Editors. We are grateful to them for the work they have done and will continue to do, and we look forward to further congratulating them next year. We believe Marina, Bernard, and Federico will be outstanding successors and we thank them in advance for their service.
Finally, we are grateful to Larry Samuelson for chairing all three search committees, and we thank the search committee members for their hard and fruitful work:
Econometrica: Christian Dustmann, Lars Hansen, Alessandro Lizzeri, George Mailath, Ariel Pakes, Helene Rey, and Elie Tamer.
QE: Kate Ho, Michael Keane, Felix Kubler, Whitney Newey, and Frank Schorfheide.
TE: Jeff Ely, Johannes Horner, Gilat Levy, Meg Meyer, and Ran Spiegler.
