Understanding the Effects of Government Spending on Consumption

Jordi Gali (), J. David López-Salido and Javier Vallés

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Recent evidence suggests that consumption rises in response to an increase in government spending. That finding 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 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.

Keywords: Rule-of-thumb consumers; non-Ricardian households; fiscal multiplier; government spending; Taylor rules (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-mac and nep-pbe
Date: 2002-09, Revised 2005-08
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http://www.econ.upf.edu/docs/papers/downloads/911.pdf Whole Paper (application/pdf)

Related works:
Working Paper: Understanding the Effects of Government Spending on Consumption (2005)
Working Paper: Understanding the Effects of Government Spending on Consumption (2004)
Working Paper: Understanding the Effects of Government Spending on Consumption (2005)
Working Paper: Understanding the effects of government spending on consumption (2004)
Working Paper: Understanding the effects of government spending on consumption (2004)
Journal Article: Understanding the Effects of Government Spending on Consumption (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:upf:upfgen:911

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