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In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non- Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also because of the large negative wealth effect induced by the highly persistent nature of government spending shocks.
Consumption (Economics) -- European Union countries -- Econometric models. --- Crowding out (Economics) -- European Union countries -- Econometric models. --- Electronic books. -- local. --- European Union countries -- Appropriations and expenditures -- Econometric models. --- Fiscal policy -- European Union countries -- Econometric models. --- Macroeconomics --- Public Finance --- National Government Expenditures and Related Policies: General --- Macroeconomics: Consumption --- Saving --- Wealth --- Labor Economics: General --- Fiscal Policy --- Personal Income, Wealth, and Their Distributions --- Public finance & taxation --- Labour --- income economics --- Expenditure --- Consumption --- Labor --- Fiscal policy --- Disposable income --- Expenditures, Public --- Economics --- Labor economics --- National income --- United States
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Despite intense calls for safeguarding public investment in Europe, public investment expenditure, when measured in relation to GDP, has steadily fallen in the last three decades, evoking fears that economic activity may be correspondingly negatively affected. At the same time, however, public consumption in the EU-12 countries has trended up. In this paper, we provide a macroeconomic assessment of the observed change in the composition of public spending in the euro area in a medium-scale two-country dynamic stochastic general equilibrium (DSGE) model. First, we identify the channels through which both temporary and permanent public investment shocks generate larger fiscal multipliers than exogenous increases in public consumption. Second, we quantify the negative impact of a change in fiscal stance, characterized by a permanent rise in public consumption and a permanent fall in public investment, keeping the overall level of public spending constant. The key message of the paper is that calls for reversing the observed trend in the composition of public spending are well justified.
Investments: General --- Macroeconomics --- Public Finance --- National Government Expenditures and Related Policies: Infrastructures --- Other Public Investment and Capital Stock --- Macroeconomics: Consumption --- Saving --- Wealth --- National Government Expenditures and Related Policies: General --- Investment --- Capital --- Intangible Capital --- Capacity --- Public finance & taxation --- Public investment spending --- Public investment and public-private partnerships (PPP) --- Consumption --- Expenditure --- Private investment --- Public investments --- Public-private sector cooperation --- Economics --- Expenditures, Public --- Saving and investment --- United States
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In recent years, New Keynesian dynamic stochastic general equilibrium (NK DSGE) models have become increasingly popular in the academic literature and in policy analysis. However, the success of these models in reproducing the dynamic behavior of an economy following structural shocks is still disputed. This paper attempts to shed light on this issue. We use a VAR with sign restrictions that are robust to model and parameter uncertainty to estimate the effects of monetary policy, preference, government spending, investment, price markup, technology, and labor supply shocks on macroeconomic variables in the United States and the euro area. In contrast to the NK DSGE models, the empirical results indicate that technology shocks have a positive effect on hours worked, and investment and preference shocks have a positive impact on consumption and investment, respectively. While the former is in line with the predictions of Real Business Cycle models, the latter indicates the relevance of accelerator effects, as described by earlier Keynesian models. We also show that NK DSGE models might overemphasize the contribution of cost-push shocks to business cycle fluctuations while, at the same time, underestimating the importance of other shocks such as changes to technology and investment adjustment costs.
Econometrics --- Labor --- Public Finance --- Computable and Other Applied General Equilibrium Models --- Demand and Supply of Labor: General --- National Government Expenditures and Related Policies: General --- Innovation --- Research and Development --- Technological Change --- Intellectual Property Rights: General --- Wages, Compensation, and Labor Costs: General --- Econometrics & economic statistics --- Labour --- income economics --- Public finance & taxation --- Technology --- general issues --- Dynamic stochastic general equilibrium models --- Labor supply --- Expenditure --- Real wages --- Econometric models --- Labor market --- Expenditures, Public --- Wages --- United States
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