Understanding the Effects of Government Spending on Consumption
Понимание влияния государственных расходов на потребление
2007-02-08
SCID: 54.1/5zsrwmjq
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New Keynesian modelgovernment spendingprivate consumptionrule-of-thumb consumerssticky prices
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Abstract (AI)
Recent evidence suggests that consumption rises in response to an increase in government spending. That finding cannot be easily reconciled with existing optimizing business cycle models. We extend the standard new Keynesian model to allow for the presence of rule-of-thumb consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.
Key Findings
1
An extended New Keynesian model with rule-of-thumb consumers explains this evidence through their interaction with sticky prices and deficit financing.
2
Consumption increases following a rise in government spending, according to recent empirical evidence.
3
Standard optimizing business-cycle models cannot readily reconcile the observed positive consumption response to government spending.
4
The model identifies rule-of-thumb consumers, price rigidity, and deficit financing as mechanisms shaping government-spending effects on consumption.
Research Object
consumption response to government spending
Research Subject
the effects of rule-of-thumb consumers, sticky prices, and deficit financing on the consumption response to increased government spending
Publication Details
Publication Date
2007-02-08
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