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Understanding the effects of government spending on consumption

Jordi Gali (), David Lopez-Salido () and Javier Valles

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Recent evidence suggests that consumption rises in response to an increase in government spending. That finding cannot be easily reconciled with existing optimizing business cycle models. We extend the standard new Keynesian model to allow for the presence of rule-of-thumb consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.

Keywords: Rule-of-thumb consumers; non-Ricardian households; fiscal multiplier; government spending; Taylor rules (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2002-09, Revised 2005-08
New Economics Papers: this item is included in nep-mac and nep-pbe
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https://econ-papers.upf.edu/papers/911.pdf Whole Paper (application/pdf)

Related works:
Journal Article: Understanding the Effects of Government Spending on Consumption (2007) Downloads
Working Paper: Understanding the Effects of Government Spending on Consumption (2005) Downloads
Working Paper: Understanding the Effects of Government Spending on Consumption (2005) Downloads
Working Paper: Understanding the effects of government spending on consumption (2004) Downloads
Working Paper: Understanding the effects of government spending on consumption (2004) Downloads
Journal Article: Understanding the effects of government spending on consumption (2003) Downloads
Working Paper: Understanding the effects of government spending on consumption (2003) Downloads
Working Paper: Understanding the Effects of Government Spending on Consumption (2003) Downloads
Working Paper: Understanding the effects of government spending on consumption (2003) Downloads
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