The Household E ffects of Government Spending

40 Pages Posted: 6 Feb 2012

See all articles by Francesco Giavazzi

Francesco Giavazzi

National Bureau of Economic Research (NBER); University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); Centre for Economic Policy Research (CEPR)

Michael F. McMahon

University of Warwick - Faculty of Social Studies; London School of Economics & Political Science (LSE)

Date Written: January 31, 2012

Abstract

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.

Keywords: Fiscal Policy, PSID, Household Consumption, Labor Supply

JEL Classification: E62, E21, E24, D12

Suggested Citation

Giavazzi, Francesco and Giavazzi, Francesco and McMahon, Michael F., The Household E ffects of Government Spending (January 31, 2012). Available at SSRN: https://ssrn.com/abstract=1998484 or http://dx.doi.org/10.2139/ssrn.1998484

Francesco Giavazzi

National Bureau of Economic Research (NBER)

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University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

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Italy
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Michael F. McMahon (Contact Author)

University of Warwick - Faculty of Social Studies ( email )

United Kingdom

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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