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The Households Effects of Government Consumption

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  • Francesco Giavazzi
  • Michael McMahon

Abstract

This paper provides new evidence on the effects of fiscal policy by studying, using household-level data, how households respond to shifts in government spending. Our identification strategy allows us to control for time-specific aggregate effects, such as the stance of monetary policy or the U.S.-wide business cycle. However, it potentially prevents us from estimating the wealth effects associated with a shift in spending. We find significant heterogeneity in households' response to a spending shock; the effects appear vary over time depending, among other factors, on the state of business cycle and, at a lower frequency, on the composition of employment (such as the share of workers in part-time jobs). Shifts in spending could also have important distributional effects that are lost when estimating an aggregate multiplier. Heads of households working relatively few (weekly) hours, for instance, suffer from a spending shock of the type we analyzed: their consumption falls, their hours increase and their real wages fall.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17837.

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Date of creation: Feb 2012
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Publication status: published as The Household Effects of Government Spending , Francesco Giavazzi, Michael McMahon. in Fiscal Policy after the Financial Crisis , Alesina and Giavazzi. 2013
Handle: RePEc:nbr:nberwo:17837

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  1. Joseph Cullen & Price V. Fishback, 2006. "Did Big Government's Largesse Help the Locals? The Implications of WWII Spending for Local Economic Activity, 1939-1958," NBER Working Papers 12801, National Bureau of Economic Research, Inc.
  2. Valerio Ercolani, 2010. "The Precautionary Effect of Government Expenditures on Private Consumption," 2010 Meeting Papers, Society for Economic Dynamics 826, Society for Economic Dynamics.
  3. Christopher J. Nekarda & Valerie A. Ramey, 2010. "Industry Evidence on the Effects of Government Spending," NBER Working Papers 15754, National Bureau of Economic Research, Inc.
  4. Giavazzi, Francesco & McMahon, Michael, 2008. "Policy Uncertainty and Precautionary Savings," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6766, C.E.P.R. Discussion Papers.
  5. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 63-98 National Bureau of Economic Research, Inc.
  6. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 1887-1921, December.
  7. Emi Nakamura & Jón Steinsson, 2011. "Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions," NBER Working Papers 17391, National Bureau of Economic Research, Inc.
  8. Eric M. Leeper & Nora Traum & Todd B. Walker, 2011. "Clearing Up the Fiscal Multiplier Morass," NBER Working Papers 17444, National Bureau of Economic Research, Inc.
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