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The Household Effects of Government Spending

In: Fiscal Policy after the Financial Crisis

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  • Francesco Giavazzi
  • Michael McMahon

Abstract

This paper provides new evidence on the effects of scal policy by studying, using household-level data, how households respond to shifts in government spending. Our identi cation strategy allows us to control for time-specific aggregate effects, such as the stance of monetary policy or the U.S.-wide business cycle. However, it potentially prevents us from estimating the wealth e ects associated with a shift in spending. We find significant heterogeneity in households' response to a spending shock ; the effects appear vary over time depending, among other factors, on the state of business cycle and, at a lower frequency, on the composition of employment (such as the share of workers in part-time jobs). Shifts in spending could also have important distributional effects that are lost when estimating an aggregate multiplier. Heads of households working relatively few (weekly) hours, for instance, suffer from a spending shock of the type we analyzed : their consumption falls, their hours increase and their real wages fall. Key words: Fiscal Policy ; PSID ; Household Consumption ; Labor Supply JEL classification: E62 ; E21 ; E24 ; D12

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This chapter was published in:

  • Alberto Alesina & Francesco Giavazzi, 2013. "Fiscal Policy after the Financial Crisis," NBER Books, National Bureau of Economic Research, Inc, number ales11-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12636.

    Handle: RePEc:nbr:nberch:12636

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    1. Del Negro, Marco, 2002. "Asymmetric shocks among U.S. states," Journal of International Economics, Elsevier, Elsevier, vol. 56(2), pages 273-297, March.
    2. Joseph Cullen & Price V. Fishback, 2006. "Did Big Government's Largesse Help the Locals? The Implications of WWII Spending for Local Economic Activity, 1939-1958," NBER Working Papers 12801, National Bureau of Economic Research, Inc.
    3. Christopher J. Nekarda & Valerie A. Ramey, 2010. "Industry Evidence on the Effects of Government Spending," NBER Working Papers 15754, National Bureau of Economic Research, Inc.
    4. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
    5. Atkeson, A. & Ogaki, M., 1991. "Wealth-Varying Intertemporal Elasticities of Substitution Evidence from Panel and Aggregate Data," RCER Working Papers 303, University of Rochester - Center for Economic Research (RCER).
    6. Francesco Giavazzi & Michael McMahon, 2008. "Policy uncertainty and precautionary savings," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19608, London School of Economics and Political Science, LSE Library.
    7. Valerio Ercolani, 2010. "The Precautionary Effect of Government Expenditures on Private Consumption," 2010 Meeting Papers, Society for Economic Dynamics 826, Society for Economic Dynamics.
    8. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 63-98 National Bureau of Economic Research, Inc.
    9. Lilia Maliar & Serguei Maliar, 2002. "The Representative Consumer In The Neoclassical Growth Model With Idiosyncratic Shocks," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2002-20, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    10. Constantinides, George M, 1982. "Intertemporal Asset Pricing with Heterogeneous Consumers and without Demand Aggregation," The Journal of Business, University of Chicago Press, vol. 55(2), pages 253-67, April.
    11. Valerie A. Ramey, 2009. "Identifying Government Spending Shocks: It's All in the Timing," NBER Working Papers 15464, National Bureau of Economic Research, Inc.
    12. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 1887-1921, December.
    13. Emi Nakamura & J?n Steinsson, 2014. "Fiscal Stimulus in a Monetary Union: Evidence from US Regions," American Economic Review, American Economic Association, American Economic Association, vol. 104(3), pages 753-92, March.
    14. Eric M. Leeper & Nora Traum & Todd B. Walker, 2011. "Clearing Up the Fiscal Multiplier Morass," NBER Working Papers 17444, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Daniel Wilson & Sylvain Leduc, 2012. "Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment," 2012 Meeting Papers, Society for Economic Dynamics 210, Society for Economic Dynamics.
    2. Alberto Alesina & Carlo Ambrogio Favero & Francesco Giavazzi, 2012. "The output effect of fiscal consolidations," Working Papers 450, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Pieroni, Luca & Lorusso, Marco, 2013. "The Role of Fiscal Policy Components in Private Consumption: a Re-examination of the Effects of Military and Civilian Spending," MPRA Paper 47878, University Library of Munich, Germany.
    4. Luiz de Mello, 2013. "What Can Fiscal Policy Do in the Current Recession? A Review of Recent Literature and Policy Options," Hacienda Pública Española, IEF, IEF, vol. 204(1), pages 113-139, March.

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