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.
Cavallo, Michele. 2005. “Government Consumption Expenditures and the Current Account,” Federal Reserve Bank of San Francisco Working Paper 2005-03. Available at https://doi.org/10.24148/wp2005-03