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

By Guenter Coenen, Roland Straub. Social Science Research Network, 2005

367 citations recorded by the source corpus.

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 due to the large negative wealth effect induced by the highly persistent nature of government spending shocks. JEL Classification: E32, E62

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/12f4407ee3ee53a13e97a27208469b2990590318

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Citations in the corpus

QUEST III: An Estimated Open-Economy DSGE Model of the Euro Area with Fiscal and Monetary Policy (2009, background): “The recent work by Gali et al. (2007), Coenen and Straub (2005) and Forni et al. (2006) has also highlighted the presence of liquidity constraints as anadditionalmarket imperfection.”
Clearing Up the Fiscal Multiplier Morass (2011, background): “We raise the level of government spending by 1 percent for two years, accompanied by two years in which taxes and spending do not respond to the growing government debt [Coenen et al. (2013) consider a similar scenario].”
The Effects of Discretionary Fiscal Policy on Macroeconomic Aggregates: A Reappraisal (2011, positive): “Third, some NK DSGE models include two types of households: Ricardian households and “rule-of-thumb” (or non-Ricardian) households who consume all of their current income; Coenen and Straub (2005) and Galí, Vallés and López-Salido (2007).”
The Impact of Fiscal Policy on Economic Activity Over the Business Cycle - Evidence from a Threshold VAR Analysis (2011, background): “Severely credit-constrained borrowers tend to adjust spending substantially in response to even a contemporaneous change in disposable income, which can even result 2The importance of non-Ricardian households for fiscal policy effects is discussed in Coenen and Straub (2005), among others.”
Keynesian Government Spending Multipliers and Spillovers in the Euro Area (2011, neutral): “(9)This finding is similar to euro area estimates of 25 to 35% by Coenen and Straub (2005) and 30 to 40% by Forni, Monteforte, and Sessa (2009). For the United States Cogan et al. (2010) obtained an estimate of 27% rule-of-thumb households.”
Fiscal consolidation in the euro area: long-run benefits and short-run costs (2008, neutral): “the estimates reported in Coenen and Straub (2005) , while all other structural parameters”
Tax Reform and Labour-Market Performance in the Euro Area: A Simulation-Based Analysis Using the New Area-Wide Model (2008, methodology): “In calibrating the behaviour of the two types of households, we set the size of household J to 0.25, in line with the estimates reported in Coenen and Straub (2005).”
Understanding the Effects of Government Spending on Consumption (2004, positive): “Early examples of efforts in that direction can already be found in the work of Coenen and Straub (2005), Erceg, Guerrieri, and Gust (2005), Forni, Monteforte, and Sessa (2006), and López-Salido and Rabanal (2006). A number of papers have documented a stronger interest rate response to changes in in”
Fiscal policy and the Great Recession in the Euro Area (2012, positive): “This result holds under more general parameterisations, as discussed in Coenen and Straub (2005).”
The general equilibrium effects of fiscal policy: Estimates for the Euro area (2007, neutral): “t=0 Q0,t ( p̃t(j)yt(j)−MCtyt(j)− κ 2 ( p̃t(j) p̃t−1(j) − π )2 P̃tyt ) (12)”