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Can public spending boost private consumption?
Author(s) -
Asimakopoulos Stylianos,
Lorusso Marco,
Pieroni Luca
Publication year - 2021
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12527
Subject(s) - economics , private consumption , government spending , consumption (sociology) , business cycle , robustness (evolution) , consumer spending , recession , fiscal policy , macroeconomics , new keynesian economics , public spending , econometrics , fiscal multiplier , permanent income hypothesis , great recession , monetary economics , monetary policy , keynesian economics , life cycle hypothesis , welfare , market economy , social science , biochemistry , chemistry , sociology , politics , gene , political science , law
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.