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The Household Effects of Government Spending

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  • Giavazzi, Francesco

    (Universita Bocconi, MIT, CEPR & NBER)

  • McMahon, Michael

    (University of Warwick, CEP (LSE) & CAMA (ANU))

Abstract

This paper provides new evidence on the effects of scal policy by studying, using household-level data, how households respond to shifts in government spending. Our identi cation 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 e ects 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. Key words: Fiscal Policy ; PSID ; Household Consumption ; Labor Supply JEL classification: E62 ; E21 ; E24 ; D12

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 977.

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Date of creation: 2012
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Handle: RePEc:wrk:warwec:977

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  1. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  2. 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.
  3. 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.
  4. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, Elsevier, vol. 115(1), pages 89-117, March.
  5. Atkeson, Andrew & Ogaki, Masao, 1996. "Wealth-varying intertemporal elasticities of substitution: Evidence from panel and aggregate data," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(3), pages 507-534, December.
  6. Marco Del Negro, 1999. "Asymmetric shocks among U.S. states," Working Papers, Centro de Investigacion Economica, ITAM 9903, Centro de Investigacion Economica, ITAM.
  7. 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.
  8. 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.
  9. 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.
  10. Valerio Ercolani, 2010. "The Precautionary Effect of Government Expenditures on Private Consumption," 2010 Meeting Papers, Society for Economic Dynamics 826, Society for Economic Dynamics.
  11. 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.
  12. Constantinides, George M, 1982. "Intertemporal Asset Pricing with Heterogeneous Consumers and without Demand Aggregation," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 55(2), pages 253-67, April.
  13. Lilia Maliar & Serguei Maliar, 2002. "The Representative Consumer In The Neoclassical Growth Model With Idiosyncratic Shocks," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2002-20, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  14. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers, Institute for Fiscal Studies W04/28, Institute for Fiscal Studies.
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Cited by:
  1. Daniel Wilson & Sylvain Leduc, 2012. "Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment," 2012 Meeting Papers, Society for Economic Dynamics 210, Society for Economic Dynamics.
  2. Alberto Alesina & Carlo Favero & Francesco Giavazzi, 2013. "The output effect of fiscal consolidations," Working Papers 478, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Pieroni, Luca & Lorusso, Marco, 2013. "The Role of Fiscal Policy Components in Private Consumption: a Re-examination of the Effects of Military and Civilian Spending," MPRA Paper 47878, University Library of Munich, Germany.
  4. Luiz de Mello, 2013. "What Can Fiscal Policy Do in the Current Recession? A Review of Recent Literature and Policy Options," Hacienda Pública Española, IEF, IEF, vol. 204(1), pages 113-139, March.

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