Fiscal Policy, Wealth Effects, and Markups

Tommaso Monacelli and Roberto Perotti ()

No 14584, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document that variations in government purchases generate a rise in consumption, the real and the product wage, and a fall in the markup. This evidence is robust across alternative empirical methodologies used to identify innovations in government spending (structural VAR vs. narrative approach). Simultaneously accounting for these facts is a formidable challenge for a neoclassical model, which relies on the wealth effect on labor supply as the main channel of transmission of unproductive government spending shocks. The goal of this paper is to explore further the role of the wealth effects in the transmission of government spending shocks. To this end, we build an otherwise standard business cycle model with price rigidity, in which preferences can be consistent with an arbitrarily small wealth effect on labor supply, and highlight that such effect is linked to the degree of complementarity between consumption and hours. We show that the model is able to match our empirical evidence on the effects of government spending shocks remarkably well. This happens when the preferences are such that the positive wealth effect on labor supply is small and therefore the negative wealth effect on consumption is, somewhat counterintuitively, large.

JEL-codes: D91 E21 E62 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-cba and nep-mac
Note: EFG POL
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (166)

Downloads: (external link)
http://www.nber.org/papers/w14584.pdf (application/pdf)

Related works:
Working Paper: Fiscal Policy, Wealth Effects and Markups (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:nbr:nberwo:14584

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w14584

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().