Can Public Spending Boost Private Consumption?

40 Pages Posted: 12 Oct 2016

See all articles by Stylianos Asimakopoulos

Stylianos Asimakopoulos

University of Bath

Marco Lorusso

Heriot-Watt University

Luca Pieroni

University of Perugia - Department of Economics

Date Written: October 7, 2016

Abstract

This paper analyses the effects on private consumption from an increase in productive and unproductive public spending. A new-Keynesian model incorporating price and wage rigidities, monetary policy and various fiscal rules is developed and estimated, using Bayesian techniques, to capture the key cyclical characteristics of the US economy. We find that price and wage rigidities along with a positive shock to the part of public spending that is productive are sufficient to boost private consumption. Moreover, we show that this initial positive reaction of private consumption is sufficient to create a positive present value consumption multiplier for more than five years. Finally, we show that our main results remain robust to changes in the monetary rule and the various methods of deficit financing.

Keywords: fiscal rules, price rigidities, taylor rule, bayesian estimation

JEL Classification: C11, E27, E52, E62, H30

Suggested Citation

Asimakopoulos, Stylianos and Lorusso, Marco and Pieroni, Luca, Can Public Spending Boost Private Consumption? (October 7, 2016). Available at SSRN: https://ssrn.com/abstract=2849520 or http://dx.doi.org/10.2139/ssrn.2849520

Stylianos Asimakopoulos (Contact Author)

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Marco Lorusso

Heriot-Watt University ( email )

Riccarton
Edinburgh EH14 4AS, Scotland EH14 1AS
United Kingdom

Luca Pieroni

University of Perugia - Department of Economics ( email )

via Pascoli, 20
PG 06123 Perugia, 06123
Italy

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