What are the impacts of government spending on the Norwegian economy?

Abstract

To analyse the effects of government spending, we use a structural vector autoregressive (SVAR) model. The recursive approach relies on the Cholesky ordering and is applied to identify a government spending shock. We apply quarterly data from Norway, with sample period 1991:1-2019:3. In the baseline model we find a short-lived, positive and significant effect on GDP, inflation and interest rate. The resulting multiplier is below one for all horizons, which could be consistent with the New Keynesian model. Extending the model, a shock to the two components of government spending, public consumption and public investment, is applied. Our main findings suggest that public investment has the largest impact, leading to a persistent and positive effect on GDP. However, the effect on GDP may also be influenced by a fall in the interest rate. Private consumption is included as another extension. The effect on private consumption is not positive, although it does not have a clear fall either, being insignificant for the whole period. Because consumption does not rise, as well as the interest rate reacts negatively, our results are leaning more towards the New Keynesian model.