Does government spending crowd in private consumption? Theory and empirical evidence for the euro area

Preprint
Publisher Website
Google Scholar
  • 1 January 2005
    • preprint
      • Published in RePEc
Abstract
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 due to the large negative wealth effect induced by the highly persistent nature of government spending shocks. JEL Classification: E32, E62

This publication has 0 references indexed in Scilit: