Fiscal Shocks and Their Consequences

Burnside, Craig; Eichenbaum, Martin; Fisher, Jonas D. M.

doi:10.3386/w9772

Cited by 173 publications

(218 citation statements)

References 16 publications

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“…Their empirical analysis shows that non-durable and service consumption slightly decreases following a government spending shock, although the effect is mostly statistically insignificant. 9 Building on Ramey and Shapiro's approach, Edelberg, Eichenbaum, and Fisher (1999) and Burnside, Eichenbaum, and Fisher (2004) also find a weak and statistically insignificant response of private consumption to the onset of a Ramey-Shapiro episode. The analysis based on this approach also yields different results regarding the response of non-residential investment and the real wage.…”

Section: Empirical Evidencementioning

confidence: 98%

Why does private consumption rise after a government spending shock?

Bouakez

Rebei

2007

Canadian J of Economics

161

131

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Abstract. Some recent empirical evidence suggests that private consumption is crowded‐in by government spending. This outcome violates neoclassical macroeconomic theory, according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption. In this paper, we develop a simple real business cycle model where preferences depend on private and public spending, and households are habit forming. The model is estimated by the maximum‐likelihood method using U.S. data. Estimation results indicate a strong Edgeworth complementarity between private and public spending. This feature enables the model to generate a positive response of consumption following a government spending shock. In addition, the impulse‐response functions generated by the estimated model are generally consistent with those obtained from a benchmark vector autoregression.

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Section: Empirical Evidencementioning

confidence: 98%

Why does private consumption rise after a government spending shock?

Bouakez

Rebei

2007

Canadian J of Economics

161

131

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“…The first order condition for the public sector union problem is similar to (12) and in equilibrium the wage of government sector workers is:…”

Section: Endogenous Choice Of Public Employment and Government Wagesmentioning

confidence: 99%

“…In the benchmark model, the government pays lump-sum transfers only to capitalists, hence L S " ls N k . 12 It is useful to assume that the government fixes the purchases of goods as a share of output, (G t " g t Y t ), public employment as a share of total population, 13 (N gt " N gt ), and the wage rate of the public sector employees and unemployment benefits as a share of the wage in the private sector, (! gt " !…”

Section: The Governmentmentioning

confidence: 99%

Fiscal policy in unionized labor markets

Ardagna

2007

Journal of Economic Dynamics and Control

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This paper investigates the effects of fiscal policy on economic activity, public finances, welfare, and income distribution in a dynamic general equilibrium model with a unionized labor market. The paper shows that debt-financed increases of public employment, wages of public sector employees, unemployment benefits and labor taxes put pressure on unions' wage claims, leading to higher private sector wages, lower employment, capital and output. In addition, increases of public employment, public wages and unemployment benefits increase workers' utility relative to the pre-policy change equilibrium during the transition, but not in the long-run. Instead, workers' utility decreases at any time horizon when labor taxes increase. Capitalists always benefit from increases in taxes on labor but their welfare decreases when public spending goes up. Finally, the paper investigates the extent to which the way the government balances its budget affects these results.

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“…Thus, Edelberg, Eichenbaum and Fisher (1999) show that a Ramey-Shapiro episode triggers a fall in real wages, an increase in nonresidential investment, and a mild and delayed fall in the consumption of nondurables and services, though durables consumption increases on impact. More recent work by Burnside, Eichenbaum and Fisher (2003) using a similar approach reports a ßat response of aggregate consumption in the short run, followed by a small (and insigniÞcant) rise in that variable several quarters after the Ramey-Shapiro episode is 15 The response of private investment to the same shock tends to be negative, especially in the second sample period.…”

mentioning

confidence: 99%

Understanding the Effects of Government Spending on Consumption

Galı́¹,

López‐Salido²,

Vallés³

2005

346

593

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Recent evidence suggests that consumption rises in response to an increase in government spending.That finding 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 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.

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Fiscal Shocks and Their Consequences

Abstract: This paper is a substantial revision to "Assessing the Effects of Fiscal Shocks" which appeared as NBER working paper no. 7459. We would like to thank Lawrence J. Christiano and Lars Hansen for helpful conversations. In addition we would like to thank several referees for useful comments.

Cited by 173 publications

References 16 publications

Why does private consumption rise after a government spending shock?

Why does private consumption rise after a government spending shock?

Fiscal policy in unionized labor markets

Understanding the Effects of Government Spending on Consumption

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