Government Spending in a New Keynesian Endogenous Growth Model

Standard New Keynesian models cannot generate the widely observed result that private consumption is crowded in by government spending. We use a New Keynesian endogenous growth model with endogenous labour supply to analyse this phenomenon. The presence of small direct productivity effects of government spending as well as Calvo pricing and a Taylor monetary policy rule significantly enhance the growth rate effect of temporary government spending. The resulting model can explain the consumption crowding-in phenomenon for realistic parameter values. We also find plausible values for the government spending multiplier.