Government Consumption Expenditures and the Current Account

This paper distinguishes between two components of government consumption, expenditure on final goods and expenditure on hours, and compares the effects of changes in these two on the current account. I find that changes in government expenditure on hours do not directly affect the current account and that their impact is considerably smaller than the impact produced by changes in government expenditure on final goods. These findings indicate that considering government consumption as entirely expenditure on final goods leads to overestimating its role in accounting for movements in the current account balance. keywords: Government expenditure; Government hours; Current account jel classification codes: E60; E62; F41 ∗Economic Research Department, 101 Market Street, Mail Stop 1130, San Francisco, CA 94105; Tel.: 415-974-3244; Fax: 415-974.2168. I thank Darrel Cohen for encouragement to work on this topic; Fabio Ghironi, Reuven Glick, Nouriel Roubini, Mark Spiegel and Diego Valderrama for helpful conversations; Judith Goff and Anita Todd for editorial assistance; and Greg Snyders for excellent research assistance. All remaining errors are my own. The views in this paper are solely my responsibility and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Federal Reserve System.