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Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area

Günter Coenen () and Roland Straub

International Finance, 2005, vol. 8, issue 3, 435-470

Abstract: In this paper, we revisit the effects of government spending shocks on private consumption which have been at centre stage of the macroeconomic policy debate for quite a long time. We conduct our analysis in an estimated model of the euro area, which is representative of a new generation of dynamic stochastic general equilibrium (DSGE) models usable for quantitative policy analysis. We show that the inclusion of non-Ricardian households, which simply consume their current disposable income, is in general conducive to raising the level of consumption in response to government spending shocks when compared with a 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 because of the large negative wealth effect induced by the highly persistent nature of government spending shocks. Copyright Blackwell Publishing Ltd. 2005

Date: 2005
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Working Paper: Does government spending crowd in private consumption? Theory and empirical evidence for the euro area (2005) Downloads
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