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

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  • Michael B. Devereux
  • Woon Gyu Choi

Abstract

This paper examines empirical issues on asymmetric effects of government spending. Increases in government spending under low real interest rates are not associated with the same increases in future tax liabilities as those under high real interest rates. Consequently, the negative impact from the Ricardian effect is smaller with lower real rates. Our empirical work on US data, using threshold regression models, provides new evidence that an expansionary government spending is more conducive to real activities when real rates are low. We also find asymmetric effects on interest rates and threshold effects associated with substitution between financing methods.

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File URL: http://repec.org/esFEAM04/up.27639.1080675636.pdf
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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 666.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:666

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Related research

Keywords: fiscal policy; government spending; Ricardian equivalence; real interest rates; regime switching; threshold vector autoregression;

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  1. Barro, Robert J., 1981. "Output Effects of Government Purchases," Scholarly Articles 3451294, Harvard University Department of Economics.
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Cited by:
  1. Choi, Woon Gyu & Wen, Yi, 2000. "Measuring Interest Rates as Determined by Thrift and Productivity," Working Papers 00-03, Cornell University, Center for Analytic Economics.
  2. Daniel Choi & Mark Holmes, 2014. "Budget deficits and real interest rates: a regime-switching reflection on Ricardian Equivalence," Journal of Economics and Finance, Springer, vol. 38(1), pages 71-83, January.

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