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Imperfect information and the excess sensitivity of private consumption to government expenditures

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  • L. POZZI

Abstract

In this paper we consider a new explanation for the often encountered observation that private consumption is excessively sensitive to anticipated government expenditures. We show that this excess sensitivity arises if consumers are aware of the government’s intertemporal budget constraint, but lack exact information on the aggregate economy. Given the strong assumption that consumers incorporate the government budget constraint, we test our model in three high debt countries where it is more likely that consumers have developed an awareness for government issues. In some of these countries and especially during periods of high debt accumulation, we observe some excess sensitivity with respect to (lagged) income and government expenditures which can be interpreted as evidence supporting our model.

Suggested Citation

  • L. Pozzi, 2003. "Imperfect information and the excess sensitivity of private consumption to government expenditures," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/173, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:03/173
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    File URL: http://wps-feb.ugent.be/Papers/wp_03_173.pdf
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    Cited by:

    1. D. Van den Poel, 2003. "Predicting Mail-Order Repeat Buying. Which Variables Matter?," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(3), pages 371-404.

    More about this item

    Keywords

    private consumption; government expenditures; excess sensitivity; government budget constraint; imperfect information;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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