A Model of the Confidence Channel of Fiscal Policy
Caio Machado; Bernardo Guimaraes; Marcel Ribeiro
Journal of Money, Credit and Banking. Volume 48, Issue 7 October 2016 Pages 1363–1395
Abstract: This article presents a simple macroeconomic model where government spending affects aggregate demand directly and indirectly, through an expectational channel. Prices are fully flexible and the model is static, so intertemporal issues play no role. There are three important elements in the model: (i) fixed adjustment costs for investment, which create an inaction zone; (ii) noisy idiosyncratic information about the aggregate economy; and (iii) imperfect substitution among private goods and goods provided by the government. An increase in government spending raises demand for private goods and may prevent a coordination failure. The optimal level of government expenditure is high when the desired level of investment is low, which we interpret as a time of low economic activity.
JEL codes: E32, E62
Keywords: fiscal policy, confidence, expectations, fiscal multiplier, aggregate demand.
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Etiquetas: aggregate demand, confidence, expectations, fiscal multiplier, fiscal policy