Working Paper
Understanding the effects of government spending on consumption
Abstract: Recent evidence on the effect of government spending shocks on consumption 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 (non-Ricardian) 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: Consumption (Economics); Government spending policy;
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Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: International Finance Discussion Papers
Publication Date: 2004
Number: 805