 Why Does Private Consumption Rise After a Government Spending Shock?Nooman Rebei and Hafedh Bouakez No 417, Econometric Society 2004 North American Summer Meetings from Econometric Society Abstract: Recent empirical evidence suggests that private consumption is crowded-in by government spending. This outcome violates existing macroeconomic theory, according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption. In this paper, we develop a simple real business cycle model where preferences depend on private and public spending, and households are habit forming. The model is estimated by the minimum-distance and the maximum-likelihood methods using U.S. data. Estimation results indicate a strong Edgeworth complementarity between private and public spending. This feature enables the model to generate a positive response of consumption following a government spending shock. In addition, the impulse-response functions generated by the estimated model mimic closely those obtained from a benchmark vector autoregression. Keywords: Fiscal policy; crowding-in effect; complementarity (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ecm:nasm04:417 Access Statistics for this paper More papers in Econometric Society 2004 North American Summer Meetings from Econometric Society Contact information at EDIRC. |
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