Abstract
One of the most debated issues in modern macroeconomics relates to the behaviour of private consumption in response to an increase in government spending. Recent empirical studies have found a positive relationship between these two macroeconomic fundamentals. However, such a finding cannot be easily reconciled with simple real business cycle models. In this paper, we develop and estimate a new Keynesian model that is able to predict a rise in consumption in response to an increase in productive public spending. We show the two key elements that lead to a statistically significant positive reaction of private consumption, thereby creating consumption present-value multipliers, are: (i) a productive component in public spending and (ii) nominal rigidities. Our key results remain valid to various robustness checks that include a sub-sample analysis examining the pre-Great Recession period and a sensitivity analysis on the structural, fiscal and monetary policy parameters of the model.
| Original language | English |
|---|---|
| Pages (from-to) | 1275-1313 |
| Number of pages | 39 |
| Journal | Canadian Journal of Economics |
| Volume | 54 |
| Issue number | 3 |
| Early online date | 19 Jun 2021 |
| DOIs | |
| Publication status | Published - 31 Aug 2021 |
Bibliographical note
Funding Information:We are grateful to Viktoriya Hnatkovska, a co‐editor of the Canadian Journal of Economics, for her detailed comments. We would like to thank the anonymous referee for kindly agreeing to provide a review of our manuscript, careful reading and helpful comments. The preliminary results of this paper were presented at the seminar series of the Department of Political Science of the University of Perugia. We appreciate the feedback on this article from Achim Ahrens, Antonio Carvalho, Giorgio d’Agostino, Paul J. Dunne, Paolo Gelain and Francesco Ravazzolo. We are grateful for the financial support provided by the Department of Political Science of the University of Perugia. The standard disclaimer applies.
ASJC Scopus subject areas
- Economics and Econometrics