Molinari, B. and F. Turino
Economic Journal – Forthcoming.
Abstract: Aggregate data reveal that in the U.S., advertising absorbs 2% of GDP. Because the purpose of brand advertising is to foster sales, we ask whether such spending appreciably affects aggregate consumption and economic activity. This question is addressed by developing and estimating a dynamic general equilibrium model in which households’ preferences for differentiated goods depend on brand advertising. Estimated results for the U.S. economy indicate that in the long-run, the presence of advertising raises aggregate consumption, investment, and hours worked, eventually fostering overall economic activity. We also find that advertising has a relevant impact on fluctuations in consumption and investment.