Understanding the effects of government spending on consumption

Recent evidence on the effect of government spending shocks on consumption 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 (non-Ricardian) 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.

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Year of publication:	2004
Authors:	Gali, Jordi ; López-Salido, David ; Valles, Javier
Institutions:	Federal Reserve Board (Board of Governors of the Federal Reserve System)
Subject:	Consumption (Economics) \| Government spending policy

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Extent:	text/html application/pdf
Series:	International Finance Discussion Papers.
Type of publication:	Book / Working Paper
Language:	English
Notes:	Number 805
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005498737