The Effect of Public Spending on Consumption: Reconciling Theory and Evidence
Steven Ambler (),
Hafedh Bouakez and
Emanuela Cardia ()
Cahiers de recherche from Universite de Montreal, Departement de sciences economiques
Abstract:
Recent empirical evidence from vector autoregressions (VARs) suggests that public spending shocks increase (crowd in) private consumption. Standard general equilibrium models predict the opposite. We show that a standard real business cycle (RBC) model in which public spending is chosen optimally can rationalize the crowding-in effect documented in the VAR literature. When such a model is used as a data-generating process, a VAR estimated using the artificial data yields a positive consumption response to an increase in public spending, consistent with the empirical findings. This result holds regardless of whether private and public purchases are complements or substitutes.
Keywords: Optimal public spending; Business cycles; Crowding in (search for similar items in EconPapers)
JEL-codes: E2 E3 H3 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2008
References: Add references at CitEc
Citations:
Downloads: (external link)
http://hdl.handle.net/1866/2579 (application/pdf)
Related works:
Working Paper: The Effect of Public Spending on Consumption: Reconciling Theory and Evidence (2008) 
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:mtl:montde:2008-11
Access Statistics for this paper
More papers in Cahiers de recherche from Universite de Montreal, Departement de sciences economiques Contact information at EDIRC.
Bibliographic data for series maintained by Sharon BREWER ().