Government spending and heterogeneous consumption dynamics

Sebastian Laumer

Journal of Economic Dynamics and Control, 2020, vol. 114, issue C

Abstract: What is the effect of government spending on consumption? Neoclassical and new Keynesian models deliver opposing predictions and empirical studies differ in their conclusions. This paper takes a data-driven approach and exploits information from over 200 variables via a Bayesian factor-augmented VAR model. I use sign restrictions for identifying effects that both classes of models agree upon. This approach imposes a minimal set of restrictions on the empirical model, leaving the sign and magnitude of the effect of government spending on consumption free to be determined by the data. I find that: (i) government spending increases aggregate consumption; (ii) the estimated spending multiplier is close to 2; (iii) there exists heterogeneity even within durable, nondurable, and service consumption variables which is undocumented in the literature. Finally, I show that my identified structural shocks are not predictable by economic agents and are uncorrelated with traditional monetary policy shocks, suggesting that these effects are not confounded by monetary policy.

Keywords: Bayesian FAVAR model; Sign restrictions; Fiscal policy; Government spending shocks; Consumption (search for similar items in EconPapers)
JEL-codes: C11 C32 E21 E62 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188920300373
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:114:y:2020:i:c:s0165188920300373

DOI: 10.1016/j.jedc.2020.103868

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().