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Non-Ricardian Households and Fiscal Policy in an Estimated DSGE Model of the Euro Area

  • Roland Straub
  • Günter Coenen

    ()

    (IMF public)

In this paper, we revisit the effects of government spending shocks on private aggregate consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households and a relatively detailed fiscal policy set up. Employing Bayesian inference methods, we show that the presence of non-Ricardian households is in general conducive to raising the level of aggregate consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. As a practical matter, however, we find that there is only a fairly small chance that government spending shocks crowd in aggregate consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also due to the large negative wealth effect induced by the highly persistent nature of government spending shocks

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 102.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:102
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