Government Spending Shocks and Rule‐Of‐Thumb Consumers with Steady‐State Inequality

23 Pages Posted: 27 Nov 2012

See all articles by Gisle James James Natvik

Gisle James James Natvik

BI Norwegian Business School - Department of Economics

Date Written: December 2012

Abstract

In the body of literature concerning fiscal policy, a central result is that government spending might stimulate private consumption because only some households save, while others spend their entire income each period. Although such heterogeneity naturally causes inequality, this complication is commonly avoided by assuming that transfers redistribute steady‐state wealth. I show that this steady‐state assumption drives short‐run results. Without redistribution, the equilibrium is indeterminate, and the labor‐market structure that is imposed to support the expansive result is theoretically inconsistent. On a more positive note, I propose a labor‐market formulation under which the expansive effects of government spending might arise.

Keywords: Fiscal policy, indeterminacy, wealth inequality

JEL Classification: E21, E25, E32, E62

Suggested Citation

Natvik, Gisle James James, Government Spending Shocks and Rule‐Of‐Thumb Consumers with Steady‐State Inequality (December 2012). The Scandinavian Journal of Economics, Vol. 114, Issue 4, pp. 1414-1436, 2012, Available at SSRN: https://ssrn.com/abstract=2181271 or http://dx.doi.org/10.1111/j.1467-9442.2012.01727.x

Gisle James James Natvik (Contact Author)

BI Norwegian Business School - Department of Economics ( email )

Nydalsveien 37
Oslo, 0484
Norway

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