The Relationship between Government Spending and Consumption

I am fortunate to be guest posting at New Economist this week and, as I note there, I hope I can live up to the blog’s excellent standards.  My first post involves how changes in government spending affect consumption, an issue beset with both theoretical and empirical uncertainties, but an important issue given recent changes in the deficit in the U.S.  The vehicle for the discussion is a recent NBER paper:

Understanding the Effects of Government Spending on Consumption, by Jordi Galí, J. David López-Salido, Javier Vallés, NBER Working Paper No. 11578, August 2005 (NBER, Free Apr. 04 version)

As explained, there is a difference in the predictions of RBC models relative to IS/LM and modified New Keynesian models.  The post at New Economist briefly reviews the theoretical models and their predictions, and then looks at the empirical evidence on government spending and consumption relationships.