The Effect of Public Spending on Consumption: Reconciling Theory and Evidence
AbstractRecent empirical evidence from vector autoregressions (VARs) suggests that public spending shocks increase (crowd in) private consumption. Standard general equilibrium models predict the opposite. We show that a standard real business cycle (RBC) model in which public spending is chosen optimally can rationalize the crowding-in effect documented in the VAR literature. When such a model is used as a data-generating process, a VAR estimated using the artificial data yields a positive consumption response to an increase in public spending, consistent with the empirical findings. This result holds regardless of whether private and public purchases are complements or substitutes.
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Bibliographic InfoPaper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2008-11.
Length: 30 pages
Date of creation: 2008
Date of revision:
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Optimal public spending; Business cycles; Crowding in;
Other versions of this item:
- AMBLER, Steve & BOUAKEZ, Hafedh & CARDIA, Emanuela, 2008. "The Effect of Public Spending on Consumption : Reconciling Theory and Evidence," Cahiers de recherche 16-2008, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
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