THE EFFECTS OF FISCAL SHOCKS IN A NEW KEYNESIAN MODEL WITH USEFUL GOVERNMENT SPENDING

Abstract

This paper develops a medium-scale New Keynesian model where consumer preferences depend on government expenditures and public capital is productivity-enhancing in order to account for recent evidence on the effects of government spending shocks. Under plausible assumptions on the degree of complementarity between private and public expenditures and on the output elasticity of public spending and considering alternative monetary policy rules, the effects of fiscal shocks delivered by the model are in line with the evidence.