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Does government spending crowd in private consumption? Theory and empirical evidence for the euro area

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  • Coenen, Günter
  • Straub, Roland

Abstract

In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non-Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also due to the large negative wealth effect induced by the highly persistent nature of government spending shocks. JEL Classification: E32, E62

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Paper provided by European Central Bank in its series Working Paper Series with number 0513.

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Date of creation: Aug 2005
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Handle: RePEc:ecb:ecbwps:20050513

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Keywords: DSGE modelling; euro area; Fiscal Policy; non-Ricardian households;

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