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The Implications for Fiscal Policy Considering Rule-of-Thumb Consumers in the New Keynesian Model for Romania

Author

Listed:
  • Ana-Maria Sandica

    () (Bucharest Academy of Economic Studies)

  • Alexie Alupoaiei

    (Bucharest Academy of Economic Studies)

Abstract

In this paper it was analyzed the effects of fiscal spending shocks on the Romanian economy. The study of the literature has suggested that the standard real business cycle and New Keynesian mod- els have difficulties in predicting the effects of fiscal policy on the economy, particularly in predicting the response of private consumption. One possible reason of this problem is that they ignore the fact that a significant fraction of households does not behave in a forward-looking manner. In this re- spect we use a New Keynesian model, where rule-of-thumb households, which consume their current income, coexist with the standard optimizing households. The main conclusion is that the response of Ricardian households, due to a negative wealth effect of governmental consumption, which is caused by a higher tax burden in the future, these households, decreases their consumption and increases their labour supply.

Suggested Citation

  • Ana-Maria Sandica & Alexie Alupoaiei, 2013. "The Implications for Fiscal Policy Considering Rule-of-Thumb Consumers in the New Keynesian Model for Romania," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(3), pages 365-371, July.
  • Handle: RePEc:hur:ijaraf:v:3:y:2013:i:3:p:365-371
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    References listed on IDEAS

    as
    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters,in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
    3. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, June.
    4. Dana Hájková & Jaromír Hurník, 2007. "Cobb-Douglas Production Function: The Case of a Converging Economy," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(9-10), pages 465-476, October.
    5. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
    6. Davide Furceri & Annabelle Mourougane, 2010. "The Effects of Fiscal Policy on Output: A DSGE Analysis," OECD Economics Department Working Papers 770, OECD Publishing.
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