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The Multiplier-Effects of Non-Wasteful Government Expenditure

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  • L. Marattin
  • M. Marzo

Abstract

Macroeconomic literature has traditionally regarded public expenditure as yielding no utility per se to any agent in the economy. In line with a few previous contributions (Linneman and Schabert 2004, Bouakez and Rebei 2007) we build a New Keynesian DSGE model with real and nominal rigidities and distortionary fiscal policy rules, calibrated on the Euro-area (1990:Q1-2008:Q4), where part of public spending is allowed to either Edgeworth complement or substitute private consumption by affecting its marginal utility. We show that the the interaction between the share of usefulness of public spending and the specification of fiscal and monetary policy rules is able to deliver private consumption multipliers which are in line with the empirical findings for the Euro-Area.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 704.

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Date of creation: Jun 2010
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Handle: RePEc:bol:bodewp:704

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  1. Marattin, Luigi & Salotti, Simone, 2011. "On the usefulness of government spending in the EU area," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 40(6), pages 780-795.
  2. Bilbiie, Florin Ovidiu, 2009. "Non-Separable Preferences and Frisch Labor Supply: One Solution to a Fiscal Policy Puzzle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7484, C.E.P.R. Discussion Papers.
  3. Lorenzo Forni & Andrea Gerali & Massimiliano Pisani, 2010. "The macroeconomics of fiscal consolidations in a monetary union: the case of Italy," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 747, Bank of Italy, Economic Research and International Relations Area.
  4. Forni, Lorenzo & Gerali, Andrea & Pisani, Massimiliano, 2010. "The macroeconomics of fiscal consolidations in euro area countries," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(9), pages 1791-1812, September.
  5. Jinill Kim, 1998. "Monetary policy in a stochastic equilibrium model with real and nominal rigidities," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-02, Board of Governors of the Federal Reserve System (U.S.).
  6. Robert E. Hall, 2009. "By How Much Does GDP Rise If the Government Buys More Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 183-249.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  8. Hafedh Bouakez & Nooman Rebei, 2007. "Why does private consumption rise after a government spending shock?," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 40(3), pages 954-979, August.
  9. Fiorito, Riccardo & Kollintzas, Tryphon, 2002. "Public Goods, Merit Goods, and the Relation Between Private and Government Consumption," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3617, C.E.P.R. Discussion Papers.
  10. Andrew Mountford & Harald Uhlig, 2008. "What are the Effects of Fiscal Policy Shocks?," NBER Working Papers 14551, National Bureau of Economic Research, Inc.
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  12. Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4334, C.E.P.R. Discussion Papers.
  13. Tommaso Monacelli & Roberto Perotti, 2008. "Openness and the Sectoral Effects of Fiscal Policy," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(2-3), pages 395-403, 04-05.
  14. Valerie A. Ramey & Matthew D. Shapiro, 1999. "Costly Capital Reallocation and the Effects of Government Spending," NBER Working Papers 6283, National Bureau of Economic Research, Inc.
  15. Morten O. Ravn & Stephanie Schmitt-Grohe & Martin Uribe, 2007. "Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate," Economics Working Papers, European University Institute ECO2007/23, European University Institute.
  16. Robert E. Hall & Paul R. Milgrom, 2005. "The Limited Influence of Unemployment on the Wage Bargain," NBER Working Papers 11245, National Bureau of Economic Research, Inc.
  17. Coenen, Günter & Straub, Roland, 2005. "Does government spending crowd in private consumption? Theory and empirical evidence for the euro area," Working Paper Series, European Central Bank 0513, European Central Bank.
  18. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 402-17, June.
  19. Barro, Robert J & King, Robert G, 1984. "Time-separable Preferences and Intertemporal-Substitution Models of Business Cycles," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(4), pages 817-39, November.
  20. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 46(2), pages 190-210, May.
  21. Linnemann, Ludger & Schabert, Andreas, 2004. "Can fiscal spending stimulate private consumption?," Economics Letters, Elsevier, Elsevier, vol. 82(2), pages 173-179, February.
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