The Implications for Fiscal Policy Considering Rule-of-Thumb Consumers in the New Keynesian Model for Romania

In this paper it was analyzed the effects of fiscal spending shocks on the Romanian economy. The study of the literature has suggested that the standard real business cycle and New Keynesian mod- els have difficulties in predicting the effects of fiscal policy on the economy, particularly in predicting the response of private consumption. One possible reason of this problem is that they ignore the fact that a significant fraction of households does not behave in a forward-looking manner. In this re- spect we use a New Keynesian model, where rule-of-thumb households, which consume their current income, coexist with the standard optimizing households. The main conclusion is that the response of Ricardian households, due to a negative wealth effect of governmental consumption, which is caused by a higher tax burden in the future, these households, decreases their consumption and increases their labour supply.