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Does government spending crowd in private consumption? Theory and empirical evidence for the euro area

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  • Coenen, Günter
  • Straub, Roland

Abstract

In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non-Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also due to the large negative wealth effect induced by the highly persistent nature of government spending shocks. JEL Classification: E32, E62

Suggested Citation

  • Coenen, Günter & Straub, Roland, 2005. "Does government spending crowd in private consumption? Theory and empirical evidence for the euro area," Working Paper Series 513, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2005513
    Note: 241047
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    More about this item

    Keywords

    DSGE modelling; euro area; fiscal policy; non-Ricardian households;
    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

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