Nonseparable Preferences, Fiscal Policy Puzzles, and Inferior Goods


  • I thank the Editor Masao Ogaki and an anonymous referee for useful comments and Tommaso Monacelli for a challenging discussion.


Nonseparable preferences over consumption and leisure can generate an increase in private consumption in response to government spending, as found in the data, in a frictionless business cycle model. However, the conditions on preferences required for these result to obtain hold if and only if the consumption good is inferior. Similarly, positive co-movement of consumption and hours worked occurs if and only if either consumption or leisure is inferior.