47 Pages Posted: 7 Aug 2007 Last revised: 10 Aug 2010
Date Written: April 1990
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.
Suggested Citation: Suggested Citation
Aiyagari, S. Rao and Christiano, Lawrence J. and Eichenbaum, Martin, The Output, Employment, and Interest Rate Effects of Government Consumption (April 1990). NBER Working Paper No. w3330. Available at SSRN: https://ssrn.com/abstract=468836