Does Government Spending Crowd In Private Consumption? Theory and Empirical Evidence for the Euro Area

In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non- Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also because of the large negative wealth effect induced by the highly persistent nature of government spending shocks.
Publication date: August 2005
ISBN: 9781451861785
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Topics covered in this book

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Economics- Macroeconomics , non-Ricardian households , DSGE modeling , government spending , government spending shocks , aggregate consumption , DSGE modelling , Macroeconomic - Aspects of Public Finance , Macroeconomic Policy , and General Outlook

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