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The Effects of Government Spending Shocks on Consumption under Optimal Stabilization

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Publication details

JournalEuropean Economic Review
DateE-pub ahead of print - 19 Mar 2009
DatePublished (current) - Oct 2009
Issue number7
Volume53
Pages (from-to)815-829
Early online date19/03/09
Original languageEnglish

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.

    Research areas

  • Consumption, Government spending, Optimal monetary and fiscal policy, Non-separable preferences, Non-Ricardian agents

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