The Adverse Effect of Government Spending on Private Consumption in New Keynesian Models

19 Pages Posted: 18 Oct 2010

See all articles by Stefan Kühn

Stefan Kühn

affiliation not provided to SSRN

Joan Muysken

University of Maastricht

Tom van Veen

Maastricht University - Department of Economics

Abstract

Empirical evidence shows that government spending crowds in private consumption, a Keynesian phenomenon. The current, state of the art, New Keynesian models based on optimizing households and firms are not able to predict such a result. In this paper, we critically analyse fiscal policy in these models using a graphical framework as well as a formal model. Extensions aimed at generating crowding in, like useful government spending or rule of thumb consumers, turn out to be inappropriate. We argue that introducing productivity enhancing government spending could potentially lead to crowding in.

Suggested Citation

Kühn, Stefan and Muysken, Joan and van Veen, Tom, The Adverse Effect of Government Spending on Private Consumption in New Keynesian Models. Metroeconomica, Vol. 61, Issue 4, pp. 621-639, November 2010. Available at SSRN: https://ssrn.com/abstract=1692394 or http://dx.doi.org/10.1111/j.1467-999X.2009.04084.x

Stefan Kühn (Contact Author)

affiliation not provided to SSRN

No Address Available

Joan Muysken

University of Maastricht ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Tom Van Veen

Maastricht University - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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