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The Effects of Government Spending Shocks on Consumption under Optimal Stabilization
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| Journal | European Economic Review |
|---|---|
| Date | E-pub ahead of print - 19 Mar 2009 |
| Date | Published (current) - Oct 2009 |
| Issue number | 7 |
| Volume | 53 |
| Pages (from-to) | 815-829 |
| Early online date | 19/03/09 |
| Original language | English |
Abstract
Economic theory has yet to come up with a general guidance regarding the dynamic effects and welfare implications of shocks to public spending. With the aim to provide a theoretical benchmark, we analyse if a rise in private consumption following an exogenous rise in government spending is a feature of the economy under optimal stabilization in a standard New Keynesian setting augmented for the presence of liquidity-constrained agents and non-separable preferences. Our results provide little evidence in support of a crowding-in effect under ‘timelessly optimal’ policy.
- Consumption, Government spending, Optimal monetary and fiscal policy, Non-separable preferences, Non-Ricardian agents
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