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Advertising and Aggregate Consumption: A Bayesian DSGE Assessment

Listed author(s):
  • Benedetto Molinari

    ()

    (University of Malaga, Spain; The Rimini Centre for Economic Analysis, Italy)

  • Francesco Turino

    ()

    (Universitat d'Alacant, Spain)

Aggregate data reveal that in the U.S. advertising absorbs approximately 2% of GDP and has a well-defined pattern over the business cycle, being strongly procyclical and highly volatile. Because the purpose of brand advertising is to foster sales, we ask whether such spending appreciably affects the dynamics of aggregate consumption and, through this avenue, the economic activity. This question is addressed by developing a dynamic general equilibrium model in which households' preferences for differentiated goods depend on the intensity of brand advertising, which is endogenously determined by profit-maximizing firms. Once the model is estimated to match the U.S. economy, it argues that in the long run the presence of advertising raises aggregate consumption, investment, and hours worked, eventually fostering the whole economic activity. We also find that advertising has a relevant impact on fluctuations in consumption and investment over the business cycle. All of the above mentioned effects are proven to depend crucially on the degree of competitiveness of advertising at the firm level.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 16-15.

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Date of creation: Jun 2016
Handle: RePEc:rim:rimwps:16-15
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  5. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, vol. 48(5), pages 1149-1167, July.
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  14. Karray, Salma & Martín-Herrán, Guiomar, 2009. "A dynamic model for advertising and pricing competition between national and store brands," European Journal of Operational Research, Elsevier, vol. 193(2), pages 451-467, March.
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