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The effects of government spending shocks on consumption under optimal stabilization

  • Horvath, Michal

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 analyse 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 liquidity-constrained 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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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 53 (2009)
Issue (Month): 7 (October)
Pages: 815-829

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Handle: RePEc:eee:eecrev:v:53:y:2009:i:7:p:815-829
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