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An Analysis of Government Spending in the Frequency Domain

Author: DARREL COHEN
Published in PFM, Vol. 7 No. 1

This paper utilizes frequency-domain techniques to characterize economically important properties of government spending and to determine the degree of substitutability between government and private consumption expenditures. Using post-war data for the United States, the analysis reveals that defense spending is best modeled as exogenous with respect to the aggregate economy and that nondefense spending (growth) appears to be white noise. Further, the unemployment rate has a very high coherency (correlation) at the business cycle frequencies with unemployment insurance. By contrast, social security benefits are largely insensitive to the business cycle but are influenced by seasonal and demographics factors. Finally, using data from 12 industrialized countries, the paper finds that the evidence, although inconclusive, suggests that direct substitutability between government and private consumption spending is widespread and often of sizable magnitude. In the process the exercise illustrates how spectral techniques can be combined with a standard intertemporal optimizing model to deliver restrictions that are testable in the frequency, but not the time, domain.

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