Understanding the Effects of Government Spending on Consumption

Galı́, Jordi; López‐Salido, J. David; Vallés, Javier

doi:10.3386/w11578

Cited by 346 publications

(657 citation statements)

References 17 publications

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“…They found that, consistent with a Keynesian view, output and consumption increase in response to a positive government spending shock. These results are in line with those obtained in Burnside et al (2004), Fatás and Mihov (2001) and Galí et al (2007), among others. In contrast with these results, another stream of the literature has found that fiscal policy may have non-Keynesian effects.…”

Section: Empirical Evidencesupporting

confidence: 93%

“…The results in the previous subsection seem at odds with the widespread view that the presence of hand-to-mouth (RoT) consumers, with a marginal propensity to consume equal to 1, is essential to obtain high fiscal multipliers (Galí et al, 2007), as these consumers can be considered constrained by an extreme form of financial market (non) participation (i.e. a limiting case where m b = 0).…”

Section: Indebted Households Versus Rule Of Thumb Consumersmentioning

confidence: 91%

“…More specifically, in neoclassical models where consumers fully optimise intertemporally, increases in government spending lead to a decline in consumption, while in models populated with rule-of-thumb consumers the opposite is true. Galí et al (2007) summarise the empirical evidence to this respect and conclude that none of the evidence appears to support the kind of strong negative comovement between output and consumption predicted by the neoclassical model in response to changes in government spending. The bulk of empirical papers focusing on the response to changes in government spending tend to support the traditional Keynesian hypothesis that consumption expenditure rises after a positive government spending shock.…”

Section: Empirical Evidencementioning

confidence: 92%

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Household Leverage and Fiscal Multipliers

2012

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We study the size of government spending multipliers in a general equilibrium model with search and matching frictions in which we allow for different levels of household indebtedness. The main results of the paper are: (a) the presence of impatient households and private debt helps generate government spending multipliers greater than 1; (b) as financial conditions worsen and impatient consumers find it more difficult to borrow (i.e. in a credit crunch), the size of the government spending multiplier falls; (c) conversely, employment, vacancies and unemployment multipliers are larger when access to credit becomes more difficult; and (d) the model explains the observed pattern of responses of labour market variables, housing prices and private debt to a fiscal shock reasonably well. On these grounds it outperforms the standard model with RoT (Hand-to-Mouth) consumers whose predictions for the labour market are at odds with the data. As a side point, our framework makes it clear why RoT households' lack of asset holdings is responsible for the extremely high fiscal multipliers that they produce.

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Section: Empirical Evidencesupporting

confidence: 93%

Section: Indebted Households Versus Rule Of Thumb Consumersmentioning

confidence: 91%

Section: Empirical Evidencementioning

confidence: 92%

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Household Leverage and Fiscal Multipliers

2012

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“…Galí, López-Salido, and Vallés (2006) implement "rule-of-thumb" consumers, whose consumption equals labor income. 3…”

Section: Among Others) Formentioning

confidence: 99%

The Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany: A Disaggregated SVAR Analysis

Tenhofen

Wolff

Heppke-Falk

2010

Jahrbücher Für Nationalökonomie Und Statistik

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Abstract:We investigate the short-term effects of fiscal policy shocks on the German economy following the SVAR approach by Blanchard and Perotti (2002). We find that direct government expenditure shocks increase output and private consumption on impact with low statistical significance, while they decrease private investment, though insignificantly. For the sub-category government investment -in contrast to government consumption -a positive output effect is found, which is statistically significant until 12 quarters ahead. Allowing for anticipation effects of fiscal policy does not change the sign of the positive consumption response. Anticipated expenditure shocks have significant effects on output when the shock is realized, but not in the period of anticipation.In sum, effects of expenditure shocks are only short-lived. Government net revenue shocks do not affect output with statistical significance. However, when splitting up this aggregate, direct taxes lower output significantly, while small indirect tax revenue shocks have little effects. Compensation of public employees is equally not effective in stimulating the economy.Keywords: Fiscal policy, government spending, net revenue, policy anticipation, structural vector autoregression. JEL-Classification: E62, H30. Non-technical summaryIn this paper, we investigate the effects of fiscal policy shocks on the German economy. Most studies investigate fiscal policy in the US. For Europe, the number of papers appears to be limited. As for Germany, few studies exist (e.g., Höppner (2003) and Perotti (2005) However, it is difficult to draw conclusions on the effects of large structural changes of tax rates in this context. We go beyond existing studies by providing a disaggregated analysis and employing a comparatively long sample (1974:1 -2004:4). We find that in the short run direct government expenditure shocks increase output and private consumption with low statistical significance, while they decrease private investment, though insignificantly.These effects disappear after a few quarters, thereby indicating the vanishing character of effects on GDP stemming from one-off government expenditure increases. The possible long-term effects on government debt are discounted in this model. According to our estimation results government investment as sub-component of direct government expenditure -in contrast to government consumption -has positive effects on output, being reflected in statistical significance lasting until 12 quarters ahead. Allowing for the possibility of one period ahead anticipation of fiscal policy in the framework of this estimation approach does not change the sign of the positive consumption response. In our model, we find that anticipated expenditure shocks have significant effects on output when the shock is realized, but not in the period of anticipation.Small shocks to government net revenue do not affect output with statistical significance. However, when splitting up this aggregate, direct tax shocks lower output significantly, while ...

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“…For this, the departure from the Ricardian equivalence is necessary. There are two alternatives: Overlapping generation structure or rule of thumb (liquidity-constrained consumers) structure, developed by Gali et al (2007). We discard the last alternative from our analysis because the rule of thumb is an ad-hoc assumption.…”

Section: Introductionmentioning

confidence: 99%

Deep Habits and the Macroeconomic Effects of Government Debt

Aloui

2013

Macroecon. Dynam.

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Abstract:In this paper, we study the e¤ects of government debt on macroeconomic aggregates in a non-Ricardian framework. We develop a micro-founded framework which combines time-varying markups, endogenous labor supply and overlapping generations based on in…nitely-lived families. The main contribution of this paper is to provide a new transmission mechanism of public debt through the countercyclical markup movements induced by external deep habits. We analyze the e¤ects of debt-…nanced tax cuts. We show that the interest rate rises, entailing higher markups, which imply a fall in employment and consumption. It is particularily noteworthy that, even without capital, a crowding out e¤ect of government debt is obtained in the long run. However, the short-run expansionary e¤ect of debt-…nanced tax cuts, which would eventually be expected in a non-Ricardian framework, fails to occur. This is due to our ‡exible-price framework. On the other hand, we show that incorporating sticky prices in our model causes debt-…nanced tax cuts to have a short-run expansionary e¤ect while preserving the long-run contractionary e¤ect. JEL Codes : E63; E52Keywords : Wealth E¤ects, Fiscal Policy, Public Debt Shock, Deep Habits, Overlapping Generations, Monopolistic Competition. 2 Non-T echnical SummaryThe recent economic crisis in Europe and United States has induced many governments to intervene to …ght the recession. The active use of …scal policy has revived the old debate on the impact of government spending and debt on economic activity. In order to analyze this issue the failure of Ricardian equivalence is required, as otherwise …scal policy is neutral and government debt has no e¤ect on macroeconomic aggregates. In this paper, the Ricardian equivalence breaks down because of the overlapping generations structure of our model.Traditionally it is suggested that an expansionary …scal policy has a positive e¤ect on aggregate demand in the short run but negative e¤ects in the long run due to the crowding-out e¤ects on investment. From the theoretical point of view, can we have a model, without capital and default risk, capable of reproducing the short-run expansionary e¤ect of public debt, while preserving the long-run negative e¤ects?In this paper we analyze the e¤ects of public debt change in a nonRicardian framework without capital, with endogenous labor supply and time-varying markups. We …nd that a tax cut …nanced by government debt entails a fall in consumption and employment both in the short run and in the long run when prices are ‡exible. Notice that the long-run crowding out e¤ect on output is preserved even without capital. However, we do not …nd the traditional short-run expansionary e¤ect on output and consumption. On the other hand, when prices are sticky, the short-run expansionary e¤ect is obtained. So this paper o¤ers a micro-founded general equilibrium model, where government debt has a short-run expansionary e¤ect and longrun contractionary e¤ect which is not related to the capital. The novelty in this paper is the ...

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Understanding the Effects of Government Spending on Consumption

Cited by 346 publications

References 17 publications

Household Leverage and Fiscal Multipliers

Household Leverage and Fiscal Multipliers

The Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany: A Disaggregated SVAR Analysis

Deep Habits and the Macroeconomic Effects of Government Debt

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