Munich Personal RePEc Archive

Explaining the Effects of Government Spending Shocks

Zubairy, Sarah (2010): Explaining the Effects of Government Spending Shocks.

[img]
Preview
PDF
MPRA_paper_26051.pdf

Download (261kB) | Preview

Abstract

The objective of this paper is to identify and explain effects of a government spending shock. After accounting for large military events, I find that in response to a structural unanticipated government spending shock, output, hours, consumption and wages all rise, whereas investment falls on impact. I construct and estimate a dynamic general equilibrium model featuring deep habit formation and show that it successfully explains these effects. In particular, deep habits give rise to countercyclical markups and thus act as transmission mechanism for the effects of government spending shocks on private consumption and wages. In addition, I show that deep habits significantly improve the fit of the model compared to a model with habit formation at the level of aggregate goods.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.