UNDERSTANDING THE EFFECTS OF GOVERNMENT SPENDING ON CONSUMPTION

Recent evidence suggests that consumption rises in response to an increase in government spending. That finding cannot be easily reconciled with existing optimizing business cycle models. We extend the standard new Keynesian model to allow for the presence of rule-of-thumb consumers. We show how the...

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Veröffentlicht in:	Journal of the European Economic Association 2007-03, Vol.5 (1), p.227-270
Hauptverfasser:	Galí, Jordi, López-Salido, J. David, Vallés, Javier
Format:	Artikel
Sprache:	eng
Schlagworte:	Aggregate analysis Consumer behavior Consumer behaviour Consumer economics Consumer equilibrium Consumer spending Consumption Deficit financing Economic impact analysis Empirical evidence Government spending Household consumption Income taxes Labor markets Macroeconomics Modeling Public expenditure Sticky prices
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Beschreibung
Zusammenfassung:	Recent evidence suggests that consumption rises in response to an increase in government spending. That finding cannot be easily reconciled with existing optimizing business cycle models. We extend the standard new Keynesian model to allow for the presence of rule-of-thumb consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.
ISSN:	1542-4766 1542-4774
DOI:	10.1162/JEEA.2007.5.1.227