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Imperfect information and the excess sensitivity of private consumption to government expenditures

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  • L. POZZI

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    Abstract

    In this paper we consider a new explanation for the often encountered observation that private consumption is excessively sensitive to anticipated government expenditures. We show that this excess sensitivity arises if consumers are aware of the government’s intertemporal budget constraint, but lack exact information on the aggregate economy. Given the strong assumption that consumers incorporate the government budget constraint, we test our model in three high debt countries where it is more likely that consumers have developed an awareness for government issues. In some of these countries and especially during periods of high debt accumulation, we observe some excess sensitivity with respect to (lagged) income and government expenditures which can be interpreted as evidence supporting our model.

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    File URL: http://www.feb.ugent.be/nl/Ondz/wp/Papers/wp_03_173.pdf
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    Bibliographic Info

    Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 03/173.

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    Length: 32 pages
    Date of creation: Apr 2003
    Date of revision:
    Handle: RePEc:rug:rugwps:03/173

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    Related research

    Keywords: private consumption; government expenditures; excess sensitivity; government budget constraint; imperfect information;

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    Cited by:
    1. D. Van den Poel, 2003. "Predicting Mail-Order Repeat Buying. Which Variables Matter?," Review of Business and Economics, Katholieke Universiteit Leuven, Faculteit Economie en Bedrijfswetenschappen, vol. 0(3), pages 371-404.

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