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Does Government Spending Crowd In Private Consumption? Theory and Empirical Evidence for the Euro Area

  • Günter Coenen
  • Roland Straub

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 because of the large negative wealth effect induced by the highly persistent nature of government spending shocks.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/159.

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Length: 37
Date of creation: 01 Aug 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/159
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