Evaluating Changes in the Transmission Mechanism of Government Spending Shocks

Nooman Rebei

No 2017/049, IMF Working Papers from International Monetary Fund

Abstract: We empirically revisit the crowding-in effect of government spending on private consumption based on rolling windows of U.S. data. Results show that in earlier samples government spending is increasingly crowding in private consumption; however, this relation is reverted in the latest periods. We propose a model embedding non-separable public and private consumption in the utility function and rule-of-thumb consumers to assess the sources of non-monotonic changes in the transmission of the shock. The iterative full information estimation of the model reveals that changes in the co-movement between private and public spending is primarily driven by the fluctuations in the elasticity of substitution between private and public consumption, the share of financially constrained consumers, and the elasticity of intertemporal substitution.

Keywords: WP; government spending; Bayesian Vector Autoregression; Rule-of-thumb consumers; Government spending in utility; Tax rule; government spending shock; impulse-response function; crowding in; reaction decline; shocks to the economy; consumption adjustment; government spending multiplier; consumption response; Private consumption; Consumption; Real wages; Sticky prices (search for similar items in EconPapers)
Pages: 31
Date: 2017-03-10
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Journal Article: Evaluating Changes in the Transmission Mechanism of Government Spending Shocks (2021)
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