The Effect of Government Spending on Private Consumption: A Puzzle?

Ludger Linnemann

Journal of Money, Credit and Banking, 2006, vol. 38, issue 7, 1715-1735

Abstract: The empirical finding that cyclical changes in government spending tend to be associated with positive responses of private consumption has been interpreted as a challenge for representative agent intertemporal optimizing theories, which usually imply that the negative wealth effect of higher fiscal spending reduces the households' consumption and leisure. The present paper shows that the evidence can be explained by a standard real business cycle type model. With a nonadditively separable utility function and a small intertemporal consumption elasticity, higher fiscal spending can raise consumption and lower investment, as in the data. The nonseparable utility model is shown to imply the same consumption Euler equation as a model with "rule-of-thumb" consumers who mechanically spend their income.

Date: 2006
References: Add references at CitEc
Citations: View citations in EconPapers (91)

Downloads: (external link)
http://dx.doi.org/10.1353/mcb.2006.0094 full text (application/pdf)
Access to full text is restricted to subscribers.

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:mcb:jmoncb:v:38:y:2006:i:7:p:1715-1735

Access Statistics for this article

Journal of Money, Credit and Banking is currently edited by Robert deYoung, Paul Evans, Pok-Sang Lam and Kenneth D. West

More articles in Journal of Money, Credit and Banking from Blackwell Publishing
Bibliographic data for series maintained by Wiley-Blackwell Digital Licensing () and Christopher F. Baum ().