NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Fiscal Policy, Wealth Effects, and Markups

Tommaso Monacelli, Roberto Perotti

NBER Working Paper No. 14584
Issued in December 2008
NBER Program(s):   EFG   POL

We document that variations in government purchases generate a rise in consumption, the real and the product wage, and a fall in the markup. This evidence is robust across alternative empirical methodologies used to identify innovations in government spending (structural VAR vs. narrative approach). Simultaneously accounting for these facts is a formidable challenge for a neoclassical model, which relies on the wealth effect on labor supply as the main channel of transmission of unproductive government spending shocks. The goal of this paper is to explore further the role of the wealth effects in the transmission of government spending shocks. To this end, we build an otherwise standard business cycle model with price rigidity, in which preferences can be consistent with an arbitrarily small wealth effect on labor supply, and highlight that such effect is linked to the degree of complementarity between consumption and hours. We show that the model is able to match our empirical evidence on the effects of government spending shocks remarkably well. This happens when the preferences are such that the positive wealth effect on labor supply is small and therefore the negative wealth effect on consumption is, somewhat counterintuitively, large.

download in pdf format
   (349 K)

email paper

This paper is available as PDF (349 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14584

Users who downloaded this paper also downloaded these:
Perotti w13143 In Search of the Transmission Mechanism of Fiscal Policy
Monacelli, Perotti, and Trigari w15931 Unemployment Fiscal Multipliers
Blanchard and Perotti w7269 An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output
Ravn, Schmitt-Grohe, and Uribe w13328 Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate
Auerbach and Gorodnichenko w16311 Measuring the Output Responses to Fiscal Policy
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us