| Popis: |
Empirical work suggests that while government spending induces an increase in output, it does not signi ficantly decrease private consumption. Contrary to these fi ndings, most representative-household models in macroeconomics predict a crowding-out of private consumption by government spending. To address this issue, we develop a model with heterogeneous households and uninsurable idiosyncratic risk as in Aiyagari (1994). In a model with heterogeneous households, progressivity of taxes is a key determinant of the eff ects of government spending. A rise in government spending can be expansionary, both for output and consumption, if financed with more progressive labor taxes. However, it is contractionary if financed with less progressive taxes. With a narrative approach, we use large changes in military spending to provide evidence that government spending in the United States has been expansionary only in periods of increasing progressivity. |
