A model of the confidence channel of fiscal policy

Bernardo Guimaraes, Caio Machado and Marcel Ribeiro

No 10087, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper presents a simple macroeconomic model where government spending affects aggregate demand directly and indirectly, through an expectational channel. Prices are fully flexible and the model is static, so intertemporal issues play no role. There are three important elements in the model: (i) fixed adjustment costs for investment; (ii) noisy idiosyncratic information about the economy; and (iii) imperfect substitution among private goods and goods provided by the government. An increase in government spending raises the demand for private goods and raises firms' expectations about what others will be producing and demanding. The optimal level of government expenditure is larger when the desired level of investment is small, which we interpret as times of low economic activity

Keywords: Fiscal policy; Confidence; Expectations; Fiscal multiplier; Aggregate demand (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: A model of the confidence channel of fiscal policy (2014)
Working Paper: A model of the confidence channel of fiscal policy (2014)
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