Year: 2015
Type: article
Abstract: This paper studies two frictions, good‐specific habit formation and price rigidities, used in theoretical models to generate the crowding‐in of consumption by expansionary government spending observed in the data. Both frictions generate countercyclical price markups, rising wages, and ensuing consumption–leisure substitution to overcome the negative wealth effect of the fiscal expansion. I demonstrate that while they independently support the rise of consumption, when used together the two frictions exert opposing pressures on the markup and the wage, weakening consumption–leisure substitution. Crucially, when price stickiness is high enough in an economy with “deep” habits, consumption is crowded out by the fiscal expansion.
DOI: 10.1111/jmcb.12183
Author: PUNNOOSE JACOB
Institutions: Ghent University, The Ohio State University
Language: English
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2119850141