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:	2003-09
Authors:	Galí, Jordi ; López-Salido, J. David
Institutions:	Barcelona Graduate School of Economics (Barcelona GSE)
Subject:	Rule-of-thumb consumers \| fiscal multiplier \| government spending \| Taylor rules

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Extent:	application/pdf
Series:	Working Papers.
Type of publication:	Book / Working Paper
Notes:	Number 73
Classification:	E32 - Business Fluctuations; Cycles ; E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10010547269