Evaluating Changes in the Transmission Mechanism of Government Spending Shocks

March 10, 2017

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Format: Chicago

Nooman Rebei. Evaluating Changes in the Transmission Mechanism of Government Spending Shocks, (USA: International Monetary Fund, 2017) accessed September 18, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We empirically revisit the crowding-in effect of government spending on private consumption based on rolling windows of U.S. data. Results show that in earlier samples government spending is increasingly crowding in private consumption; however, this relation is reverted in the latest periods. We propose a model embedding non-separable public and private consumption in the utility function and rule-of-thumb consumers to assess the sources of non-monotonic changes in the transmission of the shock. The iterative full information estimation of the model reveals that changes in the co-movement between private and public spending is primarily driven by the fluctuations in the elasticity of substitution between private and public consumption, the share of financially constrained consumers, and the elasticity of intertemporal substitution.

Subject: Consumption, Expenditure, Labor, National accounts, Prices, Private consumption, Real wages, Sticky prices

Keywords: Bayesian Vector Autoregression, Consumption, Consumption adjustment, Consumption response, Crowding in, Government spending, Government spending in utility, Government spending multiplier, Government spending shock, Impulse-response function, Private consumption, Reaction decline, Real wages, Rule-of-thumb consumers, Shocks to the economy, Sticky prices, Tax rule, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/049
Stock No:

WPIEA2017049
ISBN:

9781475586060
ISSN:

1018-5941

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