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Government spending shocks and rule-of-thumb consumers: The role of steady state inequality

Author

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  • Gisle James Natvik

    (Norges Bank (Central Bank of Norway))

Abstract

Galí, López-Salido, and Vallés (2007) suggest that because part of the population follow a rule-of-thumb by which they spend their entire disposable income each period, private consumption responds positively to defcitfinanced increases in government spending. Key to this result is a centralized labor market. I show that the ability to explain the positive consumption response as a consequence of rule-of-thumb behavior hinges on the arbitrary assumption that wealth is redistributed across households in steady state. Inequality leads to equilibrium indeterminacy and undermines the theoretical foundation of the centralized labor market.

Suggested Citation

  • Gisle James Natvik, 2010. "Government spending shocks and rule-of-thumb consumers: The role of steady state inequality," Working Paper 2010/14, Norges Bank.
    • Handle: RePEc:bno:worpap:2010_14
    Note: First version:
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    File URL: https://www.norges-bank.no/en/news-events/news-publications/Papers/Working-Papers/2010/WP-201014/
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    Citations

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    Cited by:

    1. Marco Riguzzi & Philipp Wegmueller, 2017. "Economic Openness and Fiscal Multipliers," International Economic Journal, Taylor & Francis Journals, vol. 31(1), pages 1-35, January.
    2. Lorant Kaszab, 2016. "Rule-of-Thumb Consumers and Labor Tax Cut Policy at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 12(3), pages 353-390, September.
    3. Furlanetto, Francesco, 2011. "Fiscal stimulus and the role of wage rigidity," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 512-527, April.

    More about this item

    Keywords

    Rule-of-thumb consumers; wealth inequality; government spending; indeterminacy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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