Advertising and Aggregate Consumption: A Bayesian DSGE Assessment

Benedetto Molinari and Francesco Turino

No 15.02, Working Papers from Universidad Pablo de Olavide, Department of Economics

Abstract: Aggregate data reveal that advertising in the U.S. absorbs approximately 2% of GDP and has a well defined pattern over the business cycle, being strongly procyclical and highly volatile. Because the purpose of brand advertising is to foster sales, we ask whether such spending has an appreciable effect on the pattern of aggregate consumption and, through this avenue, on economic activity. This question is addressed by developing a dynamic general equilibrium model in which households' preferences for differentiated goods depend on the intensity of brand advertising, which is endogenously determined by profit-maximizing firms. Once the model is estimated to match the U.S. economy, it argues that the presence of advertising in the long run raises aggregate consumption and hours worked, eventually fostering economic activity. We also find that advertising has a relevant impact on fluctuations in consumption, investment and markup over the business cycle. All of the abovementioned effects are proven to epend crucially on the degree of competitiveness of advertising at the firm level.

Keywords: Residual Wage Inequality; Wage Polarization; Price and Composition Effects; Routinization hypothesis; Skill Biased Technical Change; Occupational Tasks; Job Polarization. (search for similar items in EconPapers)
JEL-codes: D11 E32 J22 M37 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2015-03
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mkt
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Related works:
Journal Article: Advertising and Aggregate Consumption: A Bayesian DSGE Assessment (2018)
Working Paper: Advertising and Aggregate Consumption: A Bayesian DSGE Assessment (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pab:wpaper:15.02

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