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Can public spending boost private consumption?

Author

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  • Stylianos Asimakopoulos
  • Marco Lorusso
  • Luca Pieroni
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. La dépense publique peut‐elle stimuler la consommation des ménages? En macroéconomie moderne, l'une des questions les plus débattues concerne les comportements de consommation des ménages consécutifs à une augmentation des dépenses gouvernementales. De récentes études empiriques ont établi une relation positive entre ces deux fondamentaux macroéconomiques. Néanmoins, il reste difficile de concilier de tels résultats avec les modèles de cycle réel. Dans cet article, nous développons et évaluons un nouveau modèle keynésien capable de prévoir une augmentation de la consommation consécutive à une hausse des dépenses publiques productives. Nous montrons que les deux facteurs clés conduisant à un effet positif statistiquement significatif sur la consommation des ménages, donc générateurs de multiplicateurs de consommation en valeur actualisée, sont: (i) une composante productive dans la dépense publique; et (ii) des rigidités nominales. Nos principaux résultats résistent à de nombreuses vérifications de robustesse, notamment une analyse de sous‐échantillon examinant la période antérieure à la Grande Récession ainsi qu'une analyse de sensibilité relativement aux paramètres structurels, fiscaux et de politique monétaire du modèle.

Suggested Citation

  • Stylianos Asimakopoulos & Marco Lorusso & Luca Pieroni, 2021. "Can public spending boost private consumption?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1275-1313, November.
    • Handle: RePEc:wly:canjec:v:54:y:2021:i:3:p:1275-1313
    DOI: 10.1111/caje.12527
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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