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Title: Understanding the Effects of Government Spending on Consumption

Author(s): Jordi Galí, J David López-Salido and Javier Vallés Liberal

Publication Date: September 2005

Keyword(s): fiscal multiplier, government spending, non-Ricardian households, rule-of-thumb consumers and Taylor rules

Programme Area(s): International Macroeconomics

Abstract: 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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Bibliographic Reference

Galí, J, López-Salido, J and Vallés Liberal, J. 2005. 'Understanding the Effects of Government Spending on Consumption'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5212