The household effects of government spending

• Michael McMahon, Francesco Giavazzi
• ANU - College of Business and Economics

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31 January 2012This paper provides new evidence on the effects of social policy by studying, using household-level data, how households respond to shifts in government spending.

Our identication strategy allows us to control for time-specificc aggregate effects, such as the stance of monetary policy or the U.S.-wide business cycle. However, it potentially prevents us from estimating the wealth effects associated with a shift in spending.

We find signifcant heterogeneity in households' response to a spending shock; the effects appear vary over time depending, among other factors, on the state of business cycle and, at a lower frequency, on the composition of employment (such as the share of workers in part-time jobs). Shifts in spending could also have important distributional effects that are lost when estimating an aggregate multiplier. Heads of households working relatively few (weekly) hours, for instance, suffer from a spending shock of the type we analyzed: their consumption falls, their hours increase and their real wages fall.