The European Central Bank published a working paper finding that government spending concentrated in services can also raise goods output and private consumption. Using U.S. data from 1954 through 2019, the authors find that spending shocks increase output and consumption in both sectors, lower goods prices relative to services and weaken net exports. An open-economy Heterogeneous-Agent New Keynesian model reproduces these patterns because borrowing constraints, incomplete insurance and precautionary saving lead households to spend additional income generated by higher wages and employment. Limited labor mobility pushes services wages and prices up more than those for goods, prompting consumers to shift toward relatively cheaper goods. Trade openness reduces domestic gains as stronger demand and real exchange rate appreciation increase imports and weaken exports, while a representative-agent model fails to generate the observed consumption and sectoral output responses. The findings represent the authors’ views and not those of the ECB.
2026-09-14European Central Bank
European Central Bank working paper finds household heterogeneity drives cross-sector fiscal spillovers
A European Central Bank working paper finds that service-focused government spending can raise goods output and private consumption through household income gains and shifts toward relatively cheaper goods. Household heterogeneity is central to these spillovers, while greater trade openness reduces domestic output gains through imports and exchange rate appreciation.