Can Public Spending Boost Private Consumption?

Stylianos Asimakopoulos, Marco Lorusso, Luca Pieroni

Research output: Contribution to journalArticlepeer-review

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 languageEnglish
Pages (from-to)1275-1313
Number of pages39
JournalCanadian Journal of Economics
Volume54
Issue number3
Early online date19 Jun 2021
DOIs
Publication statusPublished - 31 Aug 2021

ASJC Scopus subject areas

  • Economics and Econometrics

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