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Government spending shocks and rule-of-thumb consumers: The role of steady state inequality

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Author Info

  • Gisle James Natvik

    ()
    (Norges Bank (Central Bank of Norway))

Abstract

Galí, López-Salido, and Vallés (2007) suggest that because part of the population follow a rule-of-thumb by which they spend their entire disposable income each period, private consumption responds positively to defcitfinanced increases in government spending. Key to this result is a centralized labor market. I show that the ability to explain the positive consumption response as a consequence of rule-of-thumb behavior hinges on the arbitrary assumption that wealth is redistributed across households in steady state. Inequality leads to equilibrium indeterminacy and undermines the theoretical foundation of the centralized labor market.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2010/WP-201014/
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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2010/14.

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Length: 30 pages
Date of creation: 18 Aug 2010
Date of revision:
Handle: RePEc:bno:worpap:2010_14

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Related research

Keywords: Rule-of-thumb consumers; wealth inequality; government spending; indeterminacy;

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Cited by:
  1. Furlanetto, Francesco, 2011. "Fiscal stimulus and the role of wage rigidity," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 512-527, April.
  2. Kaszab, Lorant, 2012. "Rule-of-Thumb Consumers and Labor Tax Cut Policy in the Zero Lower Bound," Cardiff Economics Working Papers E2012/13, Cardiff University, Cardiff Business School, Economics Section, revised Apr 2013.

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