Understanding the Effects of Government Spending on Consumption

Jordi Galí, David Lopez-Salido and Javier Valles

No 11578, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2005-08
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
Note: EFG
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Citations: View citations in EconPapers (26)

Published as Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, 03.
Published as J. Galí & D. López-Salido & J. Vallés, 2003. "Understanding the effects of government spending on consumption," Proceedings, Board of Governors of the Federal Reserve System (U.S.).

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Related works:
Working Paper: Understanding the Effects of Government Spending on Consumption (2015)
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 (2003)
Working Paper: Understanding the effects of government spending on consumption (2003)
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