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Understanding the effects of government spending on consumption

  • Jordi Galí

    ()

    (Centre de Recerca en Economia Internacional)

  • J. David López Salido

    ()

    (Banco de España)

  • Javier Vallés

    ()

    (Banco de España)

Recent evidence on the effect of government spending shocks on consumption cannot be easily reconciled with existing optimizing business cycle models. We extend the standard New Keynesian model to allow for the presence of rule-of-thumb (non-Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/03/Fic/dt0321e.pdf
File Function: First version, January 2004
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0321.

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Length: 46 pages
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:bde:wpaper:0321
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