The Effects Of Fiscal Shocks On Consumption: Reconciling Theory And Data
AbstractRecent research has stressed the inconsistency between empirical evidence and the theoretical prediction of both the standard real business cycle and the New Keynesian models regarding the impact of fiscal shocks on consumption. Some authors have attempted to bridge this gap by relying on assumptions about the effects of government spending on preferences and production, or on deviations from the intertemporal optimizing framework. In this paper we follow a different route. We show that introducing at the same time imperfect competition, sticky prices and deviations from Ricardian equivalence through an overlapping generations model helps to solve the inconsistency between theory and data. Our paper can also be seen in the light of the classic controversy between Keynesians and monetarists on the effectiveness of fiscal policy. From this angle, our model can be considered a reincarnation of the classic work of (Journal of Public Economics, Vol. 2 (1973), pp. 319-337). Copyright � 2007 The Author; Journal compilation � 2007 Blackwell Publishing Ltd and The University of Manchester.
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Bibliographic InfoArticle provided by University of Manchester in its journal Manchester School.
Volume (Year): 75 (2007)
Issue (Month): 2 (03)
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- Silvia Sgherri & Tamim Bayoumi, 2009. "On Impatience and Policy Effectiveness," IMF Working Papers 09/18, International Monetary Fund.
- Ganelli, Giovanni & Tervala, Juha, 2009. "Can government spending increase private consumption? The role of complementarity," Economics Letters, Elsevier, vol. 103(1), pages 5-7, April.
- Shafik Hebous, 2011.
"The Effects Of Discretionary Fiscal Policy On Macroeconomic Aggregates: A Reappraisal,"
Journal of Economic Surveys,
Wiley Blackwell, vol. 25(4), pages 674-707, 09.
- Hebous, Shafik, 2009. "The Effects of Discretionary Fiscal Policy on Macroeconomic Aggregates: A Reappraisal," MPRA Paper 23300, University Library of Munich, Germany, revised Jun 2010.
- Juha Tervala, 2009. "Productive government spending and private consumption: a pessimistic view," Economics Bulletin, AccessEcon, vol. 29(1), pages 416-425.
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