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The Effects of Government Spending Shocks on Consumption under Optimal Stabilization

  • Michal Horvath

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Economic theory has yet to come up with a general guidance regarding the dynamic effects and welfare implications of shocks to public spending. With the aim to provide a theoretical benchmark, we analyze if a rise in private consumption following an exogenous rise in government spending is a feature of the economy under optimal stabilization in a standard New Keynesian setting augmented for the presence of liquidityconstrained agents and non-separable preferences. Our results provide little evidence in support of a crowding-in effect under ‘timelessly optimal?policy.

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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/wp0805.pdf
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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200805.

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Date of creation: 15 Nov 2008
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Handle: RePEc:san:cdmawp:0805
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  27. repec:fth:harver:1435 is not listed on IDEAS
  28. Galí, Jordi & Lopez-Salido, Jose David & Vallés Liberal, Javier, 2004. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," CEPR Discussion Papers 4347, C.E.P.R. Discussion Papers.
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