Fourth, we have seen that in several countries the persistence of the government spending
shock falls from S1 to S2. As the wealth effect falls, the neoclassical model can easily
explain the decline in the GDP and private investment responses, but it has the opposite
prediction for private consumption, since the negative wealth effect on forward-looking
consumers also weakens. The real interest rate also increases less. The neo-keynesian
model of Galí, López-Salido and Vallés [2003] has similar difficulties in explaining the
decline in the response of private consumption, because the non-ROT consumers behave
exactly like in the neoclassical model. In addition, note that not only the GDP response,
but also the spending multiplier falls in S2, hence the lower persistence of government
spending is unlikely to be the whole explanation.