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Advertising and Aggregate Consumption: A Bayesian DSGE Assessment

Author

Listed:
  • Benedetto Molinari

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

  • Francesco Turino

    () (Universitat d'Alacant, Spain)

Abstract

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.

Suggested Citation

  • Benedetto Molinari & Francesco Turino, 2016. "Advertising and Aggregate Consumption: A Bayesian DSGE Assessment," Working Paper series 16-15, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:16-15
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    References listed on IDEAS

    as
    1. Benedetto Molinari & Francesco Turino, 2009. "Advertising and Business Cycle Fluctuations," Working Papers. Serie AD 2009-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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