The Households Effects of Government Consumption

42 Pages Posted: 10 Feb 2012 Last revised: 28 Mar 2022

See all articles by Francesco Giavazzi

Francesco Giavazzi

National Bureau of Economic Research (NBER); University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); Centre for Economic Policy Research (CEPR)

Michael F. McMahon

University of Warwick - Faculty of Social Studies; London School of Economics & Political Science (LSE)

Date Written: February 2012

Abstract

This paper provides new evidence on the effects of fiscal policy by studying, using household-level data, how households respond to shifts in government spending. Our identification strategy allows us to control for time-specific aggregate effects, such as the stance of monetary policy or the U.S.-wide business cycle. However, it potentially prevents us from estimating the wealth effects associated with a shift in spending. We find significant heterogeneity in households' response to a spending shock; the effects appear vary over time depending, among other factors, on the state of business cycle and, at a lower frequency, on the composition of employment (such as the share of workers in part-time jobs). Shifts in spending could also have important distributional effects that are lost when estimating an aggregate multiplier. Heads of households working relatively few (weekly) hours, for instance, suffer from a spending shock of the type we analyzed: their consumption falls, their hours increase and their real wages fall.

Suggested Citation

Giavazzi, Francesco and Giavazzi, Francesco and McMahon, Michael F., The Households Effects of Government Consumption (February 2012). NBER Working Paper No. w17837, Available at SSRN: https://ssrn.com/abstract=2002589

Francesco Giavazzi (Contact Author)

National Bureau of Economic Research (NBER)

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University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

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+39 02 5836 3302 (Fax)

Centre for Economic Policy Research (CEPR)

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Michael F. McMahon

University of Warwick - Faculty of Social Studies ( email )

United Kingdom

London School of Economics & Political Science (LSE) ( email )

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London, WC2A 2AE
United Kingdom

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