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Understanding the effects of government spending on consumption

Author

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  • Galí, Jordi
  • López-Salido, David
  • Vallés, Javier

Abstract

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. JEL Classification: E32, E62

Suggested Citation

  • Galí, Jordi & López-Salido, David & Vallés, Javier, 2004. "Understanding the effects of government spending on consumption," Working Paper Series 339, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2004339
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    File URL: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp339.pdf
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    References listed on IDEAS

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    1. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-334, June.
    2. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-450, June.
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    More about this item

    Keywords

    Fiscal multiplier; government spending; rule-of-thumb consumers; Taylor rules;

    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

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