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THE EFFECTS OF FISCAL SHOCKS ON CONSUMPTION: RECONCILING THEORY AND DATA *
Author(s) -
GANELLI GIOVANNI
Publication year - 2007
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2007.01010.x
Subject(s) - ricardian equivalence , economics , consumption (sociology) , government spending , fiscal policy , keynesian economics , new keynesian economics , rational expectations , imperfect competition , business cycle , macroeconomics , monetarism , overlapping generations model , equivalence (formal languages) , neoclassical economics , monetary policy , market economy , social science , linguistics , philosophy , sociology , welfare
Recent research has stressed the inconsistency between empirical evidence and the theoretical prediction of both the standard real business cycle and the New Keynesian models regarding the impact of fiscal shocks on consumption. Some authors have attempted to bridge this gap by relying on assumptions about the effects of government spending on preferences and production, or on deviations from the intertemporal optimizing framework. In this paper we follow a different route. We show that introducing at the same time imperfect competition, sticky prices and deviations from Ricardian equivalence through an overlapping generations model helps to solve the inconsistency between theory and data. Our paper can also be seen in the light of the classic controversy between Keynesians and monetarists on the effectiveness of fiscal policy. From this angle, our model can be considered a reincarnation of the classic work of Blinder and Solow ( Journal of Public Economics , Vol. 2 (1973), pp. 319–337).