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Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?

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Author Info
Woon Gyu Choi (International Monetary Fund)
Michael B. Devereux (International Monetary Fund)

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Abstract

This paper empirically explores how fiscal policy (represented by increases in government spending) has asymmetric effects on economic activity across different levels of real interest rates. It suggests that the effect of fiscal policy depends on the level of real rates because the Ricardian effect is smaller at lower financin costs of fiscal policy. Using threshold vector autoregression models on U.S. data, the paper provides new evidence that expansionary government spending is more conducive to short-term growth when real rates are low. It also finds asymmetric effects on interest rates and inflation and threshold effects associated with substitution between financing methods. Copyright 2006, International Monetary Fund

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Publisher Info
Article provided by Palgrave Macmillan Journals in its journal IMF Staff Papers.

Volume (Year): 53 (2006)
Issue (Month): si ()
Pages: 8
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Handle: RePEc:pal:imfstp:v::y:2006:i:si:p:8

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Troy Davig & Eric M. Leeper, 2006. "Endogenous Monetary Policy Regime Change," Caepr Working Papers 2006-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
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