Does government spending crowd in private consumption? Theory and empirical evidence for the euro area

Günter Coenen () and Roland Straub ()
Additional contact information
Roland Straub: Monetary and Financial Systems Department, International Monetary Fund, http://www.imf.org/external/index.htm

No 513, Working Paper Series from European Central Bank

Abstract: In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non-Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also due to the large negative wealth effect induced by the highly persistent nature of government spending shocks.

Keywords: non-Ricardian households; fiscal policy; DSGE modelling; euro area. (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac and nep-pbe
Date: Written 2005-08
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Related works:
Working Paper: Does Government Spending Crowd In Private Consumption? Theory and Empirical Evidence for the Euro Area (2005)
Journal Article: Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:ecb:ecbwps:20050513

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