Understanding the Effects of Government Spending on Consumption

By Jordi Galí, D. López-Salido, Javier Vallés. Social Science Research Network, 2004

283 citations recorded by the source corpus.

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

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/66d4e2c5ebcada9dd908b03d0969089f9228575a

Citations in the corpus

• Monetary-Fiscal Policy Interactions and Fiscal Stimulus (2011, unknown): “Monacelli and Perotti (2008) eliminate the wealth effect on labor supply, which generates strong complementarity between consumption and work effort.6 Gali et al. (2007) is a departure from efforts to intervene on preferences, but the alternative is rather complex.”
• The macroeconomic effects of fiscal policy (2012, unknown): “Galı́ et al. (2007).”
• Keynesian Government Spending Multipliers and Spillovers in the Euro Area (2011, unknown): “…one allows for the possibility that many households follow "rules of thumb" like the original Keynesian consumption function with a constant marginal propensity to consume, or that they are constrained to consume all their current income (see, for example, Gali, López-Salido, and Vallés (2007)).”
• CAPITAL DESTRUCTION, JOBLESS RECOVERIES, AND THE DISCIPLINE DEVICE ROLE OF UNEMPLOYMENT (2012, unknown): “21 The elasticity of the investment–capital ratio with respect to Tobin’s Q, μ, is assumed to be equal to 1 [as in King and Watson (1996) and Gali et al. (2007)].”
• The Effects of Discretionary Fiscal Policy on Macroeconomic Aggregates: A Reappraisal (2011, unknown): “…- the reported multiplier is a 4 quarters cumulative response; after accounting for debt dynamics USA quarterly 1960-1979 Blanchard and Perotti 0.056 - Galí et al. (2007) USA quarterly 1954-2003 Blanchard and Perotti 0.78 + + Giordano et al. (2007) Italy quarterly 1982-2004 Blanchard and Perotti…”
• Fiscal Policy and the Term Structure of Interest Rates (2005, unknown): “The intuition laid out in Mankiw (2000) has been formalized in Gali, Lopez-Salido, and Valles (2005).”
• Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces (2010, unknown): “Gaĺı et al. (2007) show that a government spending shock can generate an increase in aggregate consumption in a New Keynesian model conditional on having a relatively large fraction of liquidity constrained consumers (around 30%–50% of the population).”
• On DSGE Models (2018, unknown): “Galí et al. (2007) investigate the implications of the assumption that some consumers are liquidity constrained.”
• Successful Austerity in the United States, Europe and Japan (2012, unknown): “…are no longer linear, and it is possible to distinguish, for instance, between the effects of fiscal developments during an expansionary 14 Galí et al. (2007) quantify the multiplier at 1.9 if share of rule-of-thumb consumers is 0.75 (such high proportion of rule-of-thumb consumers could…”
• What Determines Government Spending Multipliers? (2012, unknown): “As our policy variable of interest, we consider per capita government consumption expressed in logs.”