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

Author

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  • Roland Straub
  • Günter Coenen

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Abstract

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

Suggested Citation

  • Roland Straub & Günter Coenen, 2005. "Non-Ricardian Households and Fiscal Policy in an Estimated DSGE Model of the Euro Area," Computing in Economics and Finance 2005 102, Society for Computational Economics.
  • Handle: RePEc:sce:scecf5:102
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    Cited by:

    1. Matthew Canzoneri & Robert Cumby & Behzad Diba & Olena Mykhaylova, 2006. "New Keynesian Explanations of Cyclical Movements in Aggregate Inflation and Regional Inflation Differentials," Open Economies Review, Springer, vol. 17(1), pages 27-55, January.
    2. Andrea Colciago, 2006. "Sticky wages and rule of thumb consumers," Working Papers 98, University of Milano-Bicocca, Department of Economics, revised Sep 2006.
    3. Hess Chung & Eric M. Leeper, 2007. "What Has Financed Government Debt?," NBER Working Papers 13425, National Bureau of Economic Research, Inc.
    4. Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, March.
    5. Anzoategui Zapata, Juan Camilo, 2014. "Restricción a la liquidez en Colombia
      [Restriction liquidity Colombia]
      ," MPRA Paper 62043, University Library of Munich, Germany.
    6. Nicolas Maggiar & Antoine Devulder & Christophe Cahn & Stéphane Adjemian, 2008. "Variantes en univers incertain," Économie et Prévision, Programme National Persée, vol. 183(2), pages 223-238.
    7. Ulrich Frische & Ingrid Größl, 2010. "New Keynesian DSGE Models and the IS-LM Paradigm," IMK Working Paper 1-2010, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    8. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
    9. Shalva Mkhatrishvili & Zviad Zedginidze, 2015. "Modeling Macro-Fiscal Interlinkages: Case of Georgia," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 7(1), pages 15-41, March.
    10. Eric M. Leeper & Nora Traum & Todd B. Walker, 2017. "Clearing Up the Fiscal Multiplier Morass," American Economic Review, American Economic Association, pages 2409-2454.
    11. Costa Junior, Celso Jose & Sampaio, Armando Vaz & Gonçalves, Flávio de Oliveria, 2012. "Income Transfer as Model of Economic Growth," MPRA Paper 45494, University Library of Munich, Germany.
    12. Leeper, Eric M. & Plante, Michael & Traum, Nora, 2010. "Dynamics of fiscal financing in the United States," Journal of Econometrics, Elsevier, vol. 156(2), pages 304-321, June.
    13. Boswijk, H. Peter & Hommes, Cars H. & Manzan, Sebastiano, 2007. "Behavioral heterogeneity in stock prices," Journal of Economic Dynamics and Control, Elsevier, pages 1938-1970.
    14. José Luis Torres Chacon, 2015. "Introduction to Dynamic Macroeconomic General Equilibrium Models," Vernon Press Titles in Economics, Vernon Art and Science Inc, edition 2, number 54, December.
    15. Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model," NBER Chapters,in: NBER Macroeconomics Annual 2005, Volume 20, pages 383-462 National Bureau of Economic Research, Inc.
    16. Zuzana Mucka & Michal Horvath, 2015. "Fiscal Policy Matters A New DSGE Model for Slovakia," Discussion Papers Discussion Paper No. 1/20, Council for Budget Responsibility.
    17. Ludger Linnemann & Andreas Schabert, 2006. "Productive Government Expenditure In Monetary Business Cycle Models," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(1), pages 28-46, February.
    18. Mara Pirovano, 2013. "Household and firm leverage, capital flows and monetary policy in a small open economy," Working Paper Research 246, National Bank of Belgium.
    19. José Luis Torres Chacon, 2015. "Introduction to Dynamic Macroeconomic General Equilibrium Models [Second Edition, Paperback]," Vernon Press Titles in Economics, Vernon Art and Science Inc, edition 2, number 44.

    More about this item

    Keywords

    fiscal policy; DSGE models; non-Ricardian households.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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