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International Finance Discussion Papers
Hardcover
ISBN13: 9781025148311
Publisher: Hutson Street Press
Published: May 22 2025
Pages: 46
Weight: 0.54
Height: 0.25 Width: 6.14 Depth: 9.21
Language: English
Recent evidence on the effect of government spending shocks on consumption cannot be easily reconciled with existing optimizing business cycle models. We extend the standard New Keynesian model to allow for the presence of rule-of-thumb (non-Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.
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