Imperfect information and the excess sensitivity of private consumption to government expenditures
In this paper we consider a new explanation for the often encountered observation that private consumption is excessively sensitive to anticipated government expenditures. We show that this excess sensitivity arises if consumers are aware of the government’s intertemporal budget constraint, but lack exact information on the aggregate economy. Given the strong assumption that consumers incorporate the government budget constraint, we test our model in three high debt countries where it is more likely that consumers have developed an awareness for government issues. In some of these countries and especially during periods of high debt accumulation, we observe some excess sensitivity with respect to (lagged) income and government expenditures which can be interpreted as evidence supporting our model.
|Date of creation:||Apr 2003|
|Contact details of provider:|| Postal: Hoveniersberg 4, B-9000 Gent|
Phone: ++ 32 (0) 9 264 34 61
Fax: ++ 32 (0) 9 264 35 92
Web page: http://www.ugent.be/eb
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:rug:rugwps:03/173. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nathalie Verhaeghe)
If references are entirely missing, you can add them using this form.