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Understanding the effects of government spending on consumption

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  • Jordi Gali
  • David López-Salido
  • Javier Valles

Abstract

Recent evidence on the effect of government spending shocks on consumption cannot be easily reconciled with existing optimizing business cycle models. We extend the standard New Keynesian model to allow for the presence of rule-of-thumb (non-Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 805.

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Date of creation: 2004
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Handle: RePEc:fip:fedgif:805

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Keywords: Consumption (Economics) ; Government spending policy;

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