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Can Public Spending Boost Private Consumption?

Stylianos Asimakopoulos (), Marco Lorusso () and Luca Pieroni ()

No 5, CEERP Working Paper Series from Centre for Energy Economics Research and Policy, Heriot-Watt University

Abstract: This paper analyses the effects on private consumption from an increase in productive and unproductive public spending. A new Keynesian model incorporating price and wage rigidities, monetary policy and various fiscal rules is developed and estimated, using Bayesian techniques, to capture the key cyclical characteristics of the US economy. We find that price and wage rigidities along with a positive shock to the part of public spending that is productive are sufficient to boost private consumption. Moreover, we show that this initial positive reaction of private consumption is adequate to create a positive present value consumption multiplier for more than five years. Finally, we show that our main results remain robust to changes in the monetary rule and the various methods of deficit financing.

Keywords: fiscal rules; price rigidities; taylor rule; bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 E27 E52 E62 H30 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2016-12
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

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http://ceerp.hw.ac.uk/RePEc/hwc/wpaper/005.pdf First version, 2016 (application/pdf)

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