Government Spending and Consumption-Hours Preferences

Rabanal, Pau; Lopez-Salido, David

doi:10.2139/ssrn.1011703

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Government Spending and Consumption-Hours Preferences

"la Caixa" Working Paper No. 02/2006

54 Pages Posted: 6 Sep 2007

See all articles by Pau Rabanal

David Lopez-Salido

Board of Governors of the Federal Reserve System

Date Written: November 2006

Abstract

In this paper we present two extensions that have been largely omitted in the recent literature on Bayesian estimation of DSGE models. First, we pay special attention to different forms of complementarity between consumption and hours affecting the households preferences. Second, we allow for the presence of a fraction of non-Ricardian households - i.e. that have limited access to financial markets. We show that exogenous changes in government transfers are crucial to distinguish between the two sources of comovements of consumption and hours in response to government spending shocks. The main conclusion from the estimated models is that private consumption increases after a government spending shock, when either nonseparability, non-Ricardian behavior, or both, are introduced in the model. In addition, allowing for consumption-hours complementarity leads to a small, and stable over time, estimated fraction of non-Ricardian households.

Keywords: Non-Ricardian Consumers, Nonseparable Preferences, Fiscal Policy

JEL Classification: E21, E32, E52

Suggested Citation: Suggested Citation

Rabanal, Pau and Lopez-Salido, David, Government Spending and Consumption-Hours Preferences (November 2006). "la Caixa" Working Paper No. 02/2006, Available at SSRN: https://ssrn.com/abstract=1011703 or http://dx.doi.org/10.2139/ssrn.1011703