Understanding the Effects of Government Spending on Consumption

Galí, Jordi; Lopez-Salido, David; Vallés, Javier

doi:10.2139/ssrn.532982

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Understanding the Effects of Government Spending on Consumption

ECB Working Paper No. 339

FRB International Finance Discussion Paper No. 805

56 Pages Posted: 25 Aug 2004

See all articles by Jordi Galí

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

David Lopez-Salido

Board of Governors of the Federal Reserve System

Javier Vallés

Government of the Kingdom of Spain - Economic Bureau of the President

There are 3 versions of this paper

Date Written: April 2004

Abstract

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

Gali, Jordi and Lopez-Salido, David and Vallés, Javier, Understanding the Effects of Government Spending on Consumption (April 2004). ECB Working Paper No. 339, FRB International Finance Discussion Paper No. 805, Available at SSRN: https://ssrn.com/abstract=532982 or http://dx.doi.org/10.2139/ssrn.532982