Why Does Private Consumption Rise After a Government Spending Shock?
Hafedh Bouakez and
Nooman Rebei
Staff Working Papers from Bank of Canada
Abstract:
Recent empirical evidence suggests that private consumption is crowded-in by government spending. This outcome violates existing macroeconomic theory, according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption. In this paper, we develop a simple real business cycle model where preferences depend on private and public spending, and households are habit forming. The model is estimated by the minimumdistance and the maximum-likelihood methods using U.S. data. Estimation results indicate a strong Edgeworth complementarity between private and public spending. This feature enables the model to generate a positive response of consumption following a government spending shock. In addition, the impulse-response functions generated by the estimated model mimic closely those obtained from a benchmark vector autoregression.
JEL-codes: E32 E62 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2003
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Citations: View citations in EconPapers (22)
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Related works:
Journal Article: Why does private consumption rise after a government spending shock? (2007)
Journal Article: Why does private consumption rise after a government spending shock? (2007)
Working Paper: Why Does Private Consumption Rise After a Government Spending Shock? (2004)
Working Paper: Why Does Private Consumption Rise After a Government Spending Shock? (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:03-43
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