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The Expected Inflation Channel of Government Spending in the Postwar U.S.
There exist sticky price models in which the output response to a government spending change can be large if the central bank is nonresponsive to inflation. According to this ?expected inflation channel," government spending drives up expected inflation, which in turn, reduces the real interest rate and leads to an increase in private consumption. This paper examines whether the channel was important in the post-WWII U.S., with particular attention to the 2009 Recovery Act period. First, we show that a model calibrated to have a large output multiplier requires a large response of expected ...