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

August 1, 2005

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Günter Coenen, and Roland Straub. Does Government Spending Crowd In Private Consumption? Theory and Empirical Evidence for the Euro Area, (USA: International Monetary Fund, 2005) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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 because of the large negative wealth effect induced by the highly persistent nature of government spending shocks.

Subject: Consumption, Disposable income, Expenditure, Fiscal policy, Labor

Keywords: Government spending, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/159
Stock No:

WPIEA2005159
ISBN:

9781451861785
ISSN:

1018-5941

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