Econ 208 Marek Kapicka Lecture 6 The Effects of Gov’t Spending

B2) The Effects of Government Spending Extension#2: Monopolistic Competition

B2) The Effects of Government Spending Frictions

B1) The Effects of Government Spending Equilibrium Conditions

B2) The Effects of Government Spending Frictions

Final good producer has a CES production function Intermediate good producers:

B2) The Effects of Government Spending Frictions

Final good producer Intermediate good producers:

B2) The Effects of Government Spending Frictions Final good producer demands: Fixed intermediate good producers: Flexible intermediate good producers

B2) The Effects of Government Spending Frictions

Results from a world with frictions If prices are sticky and the monetary policy reacts to increased government spending by producing some inflation, the fiscal multiplier is larger If monetary policy maintains constant price level then the fiscal multiplier is the same as before

Empirical Evidence Main question: How does consumption and wages respond to an increase in government spending? Valerie Ramey (2008): The effects of military expenditures Largely unrelated to other economic factors

Real Government Spending Per Capita

The effects on GDP

The Effects on Consumption and Wages