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Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area

  • Günter Coenen
  • Roland Straub

In this paper, we revisit the effects of government spending shocks on private consumption which have been at centre stage of the macroeconomic policy debate for quite a long time. We conduct our analysis in an estimated model of the euro area, which is representative of a new generation of dynamic stochastic general equilibrium (DSGE) models usable for quantitative policy analysis. We show that the inclusion of non-Ricardian households, which simply consume their current disposable income, is in general conducive to raising the level of consumption in response to government spending shocks when compared with a benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also because of the large negative wealth effect induced by the highly persistent nature of government spending shocks. Copyright Blackwell Publishing Ltd. 2005

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Article provided by Wiley Blackwell in its journal International Finance.

Volume (Year): 8 (2005)
Issue (Month): 3 (December)
Pages: 435-470

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Handle: RePEc:bla:intfin:v:8:y:2005:i:3:p:435-470
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