Understanding the Effects of Government Spending on Consumption
56 Pages Posted: 25 Aug 2004
Date Written: April 2004
Recent evidence on the effect of government spending shocks on consumption 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 (non-Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the e¤ects of government spending.
Keywords: rule-of-thumb consumers, scal multiplier, government spending, Taylor rules
JEL Classification: E32, E62
Suggested Citation: Suggested Citation