Macroeconomic effects of fiscal policy.

Gomes, Pedro Batista Maia (2010) Macroeconomic effects of fiscal policy. PhD thesis, London School of Economics and Political Science.

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Abstract

Government spending has several components. The government buys intermediate goods and services from the private sector, it invests in infrastructure, it hires workers and pays them a wage and it also makes transfer and interest payments. While most of the theoretical papers studying the effects of government spending focus on purchases of intermediate goods and services, the main objective of this thesis is to examine two other types of expenditure. The first part studies the effects of public sector employment and wages through the labour market and their role over the business cycles in a model with search and matching frictions. The first conclusion is that different components of spending can potentially have distinct macroeconomic effects. The second conclusion is that government wages are an important element to achieve efficiency in the labour market. High wages induce too many unemployed to queue for public sector jobs and raise private sector wages, which lowers job creation in the private sector and raises unemployment. Throughout the business cycle it is optimal to have procyclical public sector wages. The second part is devoted to the study of the role of public sector capital and its interaction with the determination of labour and profit taxation. Over the past 30 years in developed countries we have observed a decline in the corporate tax rate and public investment offset by an increase in the labour income tax and government consumption. I study these trends in an optimal dynamic taxation model where the government also chooses how to allocate spending between government consumption and investment in public capital. I find that the government's decision of how to allocate spending is not independent of the decision of how to raise taxes. I then discuss several hypotheses that are consistent with the observed trends. The last part of the thesis gathers two empirical essays on labour market flows and on the determinants of sovereign debt ratings.

Item Type:	Thesis (PhD)
Uncontrolled Keywords:	Economics, General
Sets:	Collections > ProQuest Etheses Departments > Economics
URI:	http://etheses.lse.ac.uk/id/eprint/2199

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