NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Households Effects of Government Consumption

Francesco Giavazzi, Michael McMahon

NBER Working Paper No. 17837
Issued in February 2012
NBER Program(s):   IFM

This paper provides new evidence on the effects of fiscal policy by studying, using household-level data, how households respond to shifts in government spending. Our identification strategy allows us to control for time-specific aggregate effects, such as the stance of monetary policy or the U.S.-wide business cycle. However, it potentially prevents us from estimating the wealth effects associated with a shift in spending. We find significant heterogeneity in households' response to a spending shock; the effects appear vary over time depending, among other factors, on the state of business cycle and, at a lower frequency, on the composition of employment (such as the share of workers in part-time jobs). Shifts in spending could also have important distributional effects that are lost when estimating an aggregate multiplier. Heads of households working relatively few (weekly) hours, for instance, suffer from a spending shock of the type we analyzed: their consumption falls, their hours increase and their real wages fall.

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Acknowledgments

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Published: The Household Effects of Government Spending, Francesco Giavazzi, Michael McMahon, in Fiscal Policy after the Financial Crisis (2013), University of Chicago Press (p. 103 - 141)

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