Costly Capital Reallocation and the Effects of Government Spending

67 Pages Posted: 14 Jul 2000 Last revised: 7 Oct 2010

See all articles by Valerie A. Ramey

Valerie A. Ramey

University of California at San Diego; National Bureau of Economic Research (NBER)

Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 1999

Abstract

Changes in government spending often lead to significant shifts in demand across sectors. This paper analyzes the effects of sector-specific changes in government spending in a two-sector dynamic general equilibrium model in which the reallocation of capital across sectors is costly. The two-sector model leads to a richer array of possible responses of aggregate variables than the one-sector model. The empirical part of the paper estimates the effects of military buildups on a variety of macroeconomic variables using a new measure of military shocks. The behavior of macroeconomic aggregates is consistent with the predictions of a multi-sector neoclassical model. In particular, consumption, real product wages and manufacturing productivity fall in response to exogenous military buildups in the post-World War II United States.

Suggested Citation

Ramey, Valerie A. and Shapiro, Matthew D., Costly Capital Reallocation and the Effects of Government Spending (April 1999). NBER Working Paper No. w6283. Available at SSRN: https://ssrn.com/abstract=226040

Valerie A. Ramey (Contact Author)

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Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics ( email )

and Survey Research Center
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National Bureau of Economic Research (NBER) ( email )

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313-764-5419 (Phone)
313-764-2769 (Fax)

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