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The Output, Employment, and Interest Rate Effects of Government ConsumptionS. Rao AiyagariUniversity of Rochester - William E. Simon Graduate School of Business Administration (Deceased) Lawrence J. ChristianoNorthwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER) Martin EichenbaumNorthwestern University; National Bureau of Economic Research (NBER) April 1990 NBER Working Paper No. w3330 Abstract: This paper investigates the impact on aggregate variables of changes in government consumption in the context of a stochastic, neoclassical growth model. We show, theoretically, that the impact on output and employment of a persistent change in government consumption exceeds that of a temporary change. We also show that, in principle, there can be an analog to the Keynesian multiplier in the neoclassical growth model. Finally, in an empirically plausible version of the model, we show that the interest rate impact of a persistent government consumption shock exceeds that of a temporary one. Our results provide counter examples to existing claims in the literature.
Number of Pages in PDF File: 47 working papers seriesDate posted: August 7, 2007Suggested CitationContact Information
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