Understanding the Effects of Government Spending on Consumption

57 Pages Posted: 7 Oct 2005

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

Multiple version iconThere are 3 versions of this paper

Date Written: September 2005

Abstract

Recent evidence suggests that consumption rises in response to an increase in government spending. That finding 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 consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.

Keywords: Rule-of-thumb consumers, non-Ricardian households, fiscal multiplier, government spending, Taylor rules

JEL Classification: E32, E62

Suggested Citation

Gali, Jordi and Lopez-Salido, David and Vallés, Javier, Understanding the Effects of Government Spending on Consumption (September 2005). CEPR Discussion Paper No. 5212. Available at SSRN: https://ssrn.com/abstract=822785

Jordi Gali (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2754 (Phone)
+34 93 542 1746 (Fax)

HOME PAGE: http://www.econ.upf.es/~gali

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Cambridge, MA 02142
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Javier Vallés

Government of the Kingdom of Spain - Economic Bureau of the President ( email )

28071 Madrid
Spain

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