Repository logo

Infoscience

  • English
  • French
Log In
Logo EPFL, École polytechnique fédérale de Lausanne

Infoscience

  • English
  • French
Log In
  1. Home
  2. Academic and Research Output
  3. Preprints and Working Papers
  4. Deep Habits, Price Rigidities and the Consumption Response to Government Spending
 
working paper

Deep Habits, Price Rigidities and the Consumption Response to Government Spending

Jacob, Punnoose  
2011

This paper inspects the 'deep' habits mechanism originally used by Ravn, Schmitt-Grohé and Uribe (2006) to generate the positive comovement of public and private consumption observed in many VAR studies. In their set-up, the price-elasticity of demand is pro-cyclical and it is optimal for the firm to lower the mark-up while expanding production after the fiscal shock, raising the demand for labor and the real wage. Consequently, agents substitute consumption for leisure and overcome the negative wealth effect of the fiscal expansion. Here, we show that increasing price stickiness reduces the impact of the fiscal shock on the real wage and hinders the rise of consumption. If the degree of price stickiness is high enough, consumption is crowded-out. This is in contrast to the role of price rigidities in the standard New Keynesian model where they weaken the crowding-out of consumption.

  • Files
  • Details
  • Metrics
Loading...
Thumbnail Image
Name

SSRN-id1513909.pdf

Access type

openaccess

Size

535.1 KB

Format

Adobe PDF

Checksum (MD5)

8d129b8db22e888099f4f0d431be6f0f

Logo EPFL, École polytechnique fédérale de Lausanne
  • Contact
  • infoscience@epfl.ch

  • Follow us on Facebook
  • Follow us on Instagram
  • Follow us on LinkedIn
  • Follow us on X
  • Follow us on Youtube
AccessibilityLegal noticePrivacy policyCookie settingsEnd User AgreementGet helpFeedback

Infoscience is a service managed and provided by the Library and IT Services of EPFL. © EPFL, tous droits réservés