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A3 Empirical Results

Ihori (1987) clarified empirically the normative implications of actual government expenditures by estimating a private consumption function for Japan. Based on theoretical considerations, the relative effects of anticipated expansion and unanticipated expansion tell us the discrepancy between actual and optimal government expenditures. Thus, it is necessary to estimate a private consumption function that includes anticipated and unanticipated government expenditures as explanatory variables.

The empirical results suggest that anticipated government expenditures have a relatively more expansionary effect on private consumption than unanticipated government expenditures. Hence, based on the theoretical analysis in Sect. A2, the implication of these results is that government expenditures after the mid-1970s are perceived as too much. However, before the mid-1970s, the results suggest that government expenditures are perceived as less than the optimum.

A4 Conclusion

This appendix has investigated the question of how the private sector perceives the size of government spending within an explicit optimizing framework. We have shown that if government spending is initially too little, unanticipated government expenditures have a relatively more expansionary effect on private consumption than anticipated government expenditures, and vice versa. Moreover, empirical analysis may provide some evidence of a discrepancy between actual and optimal government spending. Section A3 reported a finding that for the Japanese economy, the level of government spending was regarded as too little in the 1960s, but is regarded as too much in recent years.

In the real world, all individuals are not forward-looking with regard to fiscal affairs. However, rich individuals may well be forward-looking and may engage in major intergeneration transfers. If so, normative evaluation of the level of government spending is largely based on rich individuals’ judgments. It follows that in the 1960s, the size of government was perceived as too small by rich individuals. Poor individuals would regard the size of government as too small in any case. This would explain why the size of government spending has increased since the 1970s.

It is now recognized that the Ricardian debt neutrality is more likely to hold in recent years at higher levels of government deficit. If so, middle-income individuals have been forward-looking in recent years. Further, the evaluation of the size of government in the 1980s may well be shared by most people. This would explain why the size of government spending grew more slowly in the 1980s.

Most business people now favor small government. The change in attitude has probably been caused by the fear that further increases in fiscal burdens will fall on the business community. Such a concern is the foundation of the fiscal reconstruction movement in recent years. This appendix suggests that the concern is shared by households.

Questions

  • 3.1 In the two-period model, the government collects taxes Ti and spends Gi (i = 1, 2). The government may also issue one-period maturity debt, B. Suppose T1 = 10, G1 = 20, and G2 = 15. If the rate of interest is 10 %, what is T2?
  • 3.2 Say whether the following statements are true or false and explain the reasons.
  • (a) In the neoclassical model, the fiscal multiplier is less than unity.
  • (b) If the government raises public spending to almost the same level as private consumption, private consumption directly declines.
  • (c) A promise of expansionary fiscal policy in the near future would stimulate the current economy.

References

Bailey, M. J. (1971). National income and the price level: A study in macroeconomic theory (2nd ed.). New York: McGraw-Hill.

Barro, R. J. (1974). Are government bonds net wealth? Journal of Political Economy, 82, 1095-1117.

Barro, R. J. (2008). Macroeconomics: A modern approach. Mason: Thomson/Southwestern. Ihori, T. (1987). The size of government spending and the private sector’s evaluation. The Journal of Japanese and International Economies, 1, 82-96.

Kormendi, R. C. (1983). Government debt, government spending, and private sector behavior. American Economic Review, 73, 994-1010.

 
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