A disaggregated approach to the government spending shocks: an theoretical analysis

We examine different types of government spending while literature usually treats government spending as a homogenous compound. We disaggregate the government spending into three parts; namely, government investment, government wage component consumption (i.e. wage expenditure) expenditure, and non-wage component consumption (i.e. purchases of goods and services). Next, we estimate a dynamic stochastic general equilibrium model that features a transmission mechanism with different types of government spending. In this regard, we manage to distinguish between different types of government spending where each type of spending has varied role in the economy. Such set up enables them produce different effects on macroeconomic variables.