The Output and Welfare Effects of Government Spending Shocks Over the Business Cycle

This article studies the output and welfare effects of shocks to government spending in a medium‐scale DSGE model. Our model considers both government consumption and investment and allows for a variety of fiscal financing mechanisms. We use the model to address several questions pertaining to the magnitude and state dependence of both the output and welfare effects of changes in government spending. Countercyclical government spending is undesirable as a general policy prescription, but we highlight situations (such as when monetary policy is passive or when government investment is particularly productive) in which it might be beneficial.