TY  - JOUR
AU  - Ravn,Morten O.
AU  - Schmitt-Grohé,Stephanie
AU  - Uribe,Martín
TI  - Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13328
PY  - 2007
Y2  - August 2007
UR  - http://www.nber.org/papers/w13328
L1  - http://www.nber.org/papers/w13328.pdf
N1  - Author contact info:
Morten Ravn
Department of Economics
University College London
London WC1E 6BT
UK
E-Mail: m.ravn@ucl.ac.uk

Stephanie Schmitt-Grohe
Department of Economics
Columbia University
New York, NY 10027
Tel: 212/854-8059
Fax: 212/854-4010
E-Mail: stephanie.schmittgrohe@columbia.edu

Martin Uribe
Department of Economics
Columbia University
International Affairs Building
New York, NY 10027
Tel: 212 851 4008
Fax: 212 854 8059
E-Mail: martin.uribe@columbia.edu
AB  - Using panel structural VAR analysis and quarterly data from four  industrialized countries, we document that  an increase in government purchases leads to an expansion in output and private consumption, a deterioration in the trade balance, and a depreciation of the real exchange rate (i.e., a decrease in the domestic CPI relative to the exchange-rate adjusted foreign CPI). We propose an explanation for these observed effects based on the deep habit mechanism.  We estimate the key parameters of the deep-habit model employing a limited information approach. The predictions of the estimated deep-habit model fit  well the observed responses of output, consumption, the trade balance, and the real exchange rate to an unanticipated government spending shock. In addition, the deep-habit model predicts that in response to an anticipated increase in government spending consumption and wages fail to increase on impact, which is consistent with the empirical evidence stemming from the narrative identification  approach. In this way, the deep-habit model reconciles the findings of the SVAR and narrative literatures on the effects of government spending shocks.
ER  -