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Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area

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  • Günter Coenen
  • Roland Straub

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 because of the large negative wealth effect induced by the highly persistent nature of government spending shocks.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/159.

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Length: 37
Date of creation: 01 Aug 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/159

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Keywords: Government expenditures; Private consumption; Economic models; government spending; fiscal policy; government spending shocks; aggregate consumption; disposable income; taxation; fiscal policy rule; consumption choices; fiscal authority; aggregate demand; level of consumption; fiscal multiplier; tax rates; consumption over time; budget constraint; fiscal policy framework; general equilibrium; consumption tax; consumption spending; intertemporal consumption; government budget; consumption smoothing; consumption patterns; capital accumulation; current income; response of consumption; consumption tax rate; consumption pattern; increase in consumption; fiscal policy rules; government expenditure; consumption expenditure; current disposable income; public finance; consumption level; consumption increases; fiscal variables; tax burden; consumption path; fiscal shocks; consumption choice; consumption decision; fiscal policy on consumption; consumption taxes; business cycles; permanent income;

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References

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