Government spending shocks and rule-of-thumb consumers: The role of steady state inequality

Gisle Natvik

No 2010/14, Working Paper from Norges Bank

Abstract: Galí, López-Salido, and Vallés (2007) suggest that because part of the population follow a rule-of-thumb by which they spend their entire disposable income each period, private consumption responds positively to defcitfinanced increases in government spending. Key to this result is a centralized labor market. I show that the ability to explain the positive consumption response as a consequence of rule-of-thumb behavior hinges on the arbitrary assumption that wealth is redistributed across households in steady state. Inequality leads to equilibrium indeterminacy and undermines the theoretical foundation of the centralized labor market.

Keywords: Rule-of-thumb consumers; wealth inequality; government spending; indeterminacy (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2010-08-18
New Economics Papers: this item is included in nep-mac
Note: First version:
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.norges-bank.no/en/news-events/news-pub ... pers/2010/WP-201014/

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:bno:worpap:2010_14

Access Statistics for this paper

More papers in Working Paper from Norges Bank Contact information at EDIRC.
Bibliographic data for series maintained by ().