How Can Government Spending Stimulate Consumption?

Daniel Murphy ()

Review of Economic Dynamics, 2015, vol. 18, issue 3, 551-574

Abstract: Recent empirical work finds that government spending shocks can cause aggregate consumption to increase. This paper builds on the framework of imperfect information in Lucas (1972) and Lorenzoni (2009) to show how government spending can stimulate consumption. Owners of firms targeted by an increase in government spending perceive an increase in their permanent income relative to their future tax liabilities, while owners of firms not targeted remain unaware of the implicit increase in future tax liabilities, causing aggregate consumption to increase. I show that a testable implication of this model—namely that the value of firms should increase in response to government spending shocks, implying all else equal an increase in aggregate stock returns—is consistent with empirical evidence. (Copyright: Elsevier)

Keywords: Government spending supplier; Wealth effect; Rigid wages (search for similar items in EconPapers)
JEL-codes: E30 E62 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://dx.doi.org/10.1016/j.red.2014.09.006
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See http://www.sciencedirect.com/ for details.

Related works:
Software Item: Code and data files for "How Can Government Spending Stimulate Consumption?" (2014)
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:red:issued:13-162

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2014.09.006

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().