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The Effects of Government Spending Shocks on Consumption under Optimal Stabilization

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  • Michal Horvath

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Abstract

Economic theory has yet to come up with a general guidance regarding the dynamic effects and welfare implications of shocks to public spending. With the aim to provide a theoretical benchmark, we analyze if a rise in private consumption following an exogenous rise in government spending is a feature of the economy under optimal stabilization in a standard New Keynesian setting augmented for the presence of liquidityconstrained agents and non-separable preferences. Our results provide little evidence in support of a crowding-in effect under ‘timelessly optimal?policy.

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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200805.

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Date of creation: 15 Nov 2008
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Handle: RePEc:san:cdmawp:0805

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Keywords: Consumption; Government Spending; Optimal Monetary and Fiscal Policy; Non-Separable Preferences; Non-Ricardian Agents.;

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Cited by:
  1. John W. Keating & Isaac K. Kanyama, 2013. "Is Sticky Price Adjustment Important for Output Fluctuations?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201301, University of Kansas, Department of Economics.
  2. Hsu, Minchung & Zhao, Min, 2009. "China’s Business Cycles between 1954 – 2004: Productivity and Fiscal Policy Changes," MPRA Paper 21283, University Library of Munich, Germany.

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