Does Government Spending Crowd In Private Consumption? Theory and Empirical Evidence for the Euro Area

Author/Editor:

Günter Coenen ; Roland Straub

Publication Date:

August 1, 2005

Electronic Access:

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Summary:

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 because of the large negative wealth effect induced by the highly persistent nature of government spending shocks.

Series:

Working Paper No. 05/159

Subject:

English

Publication Date:

August 1, 2005

ISBN/ISSN:

9781451861785/1018-5941

Stock No:

WPIEA2005159

Format:

Paper

Pages:

37

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