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The output, employment, and interest rate effects of government consumption

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  • S. Rao Aiyagari
  • Lawrence J. Christiano
  • Martin Eichenbaum

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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series, Macroeconomic Issues with number 90-10.

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Date of creation: 1990
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Handle: RePEc:fip:fedhma:90-10

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Keywords: Business cycles ; Expenditures; Public;

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References

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  1. Hall, Robert E., 1980. "Labor supply and aggregate fluctuations," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 12(1), pages 7-33, January.
  2. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, American Economic Association, vol. 73(5), pages 994-1010, December.
  3. Barro, Robert J., 1981. "Output Effects of Government Purchases," Scholarly Articles 3451294, Harvard University Department of Economics.
  4. Kenneth L. Judd, 1983. "Short-Run Analysis of Fiscal Policy in a Simple Perfect Foresight Model," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 559, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," Papers, Rochester, Business - General 88-05, Rochester, Business - General.
  6. Eichenbaum, Martin S & Hansen, Lars Peter & Singleton, Kenneth J, 1988. "A Time Series Analysis of Representative Agent Models of Consumption and Leisure Choice under Uncertainty," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(1), pages 51-78, February.
  7. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 24, Federal Reserve Bank of Minneapolis.
  8. Lawrence J. Christiano & Martin Eichenbaum, 1988. "Is Theory Really Ahead of Measurement? Current Real Business Cycle Theories and Aggregate Labor Market Fluctuations," NBER Working Papers 2700, National Bureau of Economic Research, Inc.
  9. Barro, Robert J & King, Robert G, 1984. "Time-separable Preferences and Intertemporal-Substitution Models of Business Cycles," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(4), pages 817-39, November.
  10. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  11. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, American Economic Association, vol. 59(1), pages 25-34, March.
  12. Hanoch, G & Levy, Haim, 1969. "The Efficiency Analysis of Choices Involving Risk," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 36(107), pages 335-46, July.
  13. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  14. Barsky, Robert B & Miron, Jeffrey A, 1989. "The Seasonal Cycle and the Business Cycle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(3), pages 503-34, June.
  15. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1982. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
  16. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 228-48, April.
  17. Lawrence J. Christiano, 1987. "Intertemporal substitution and smoothness of consumption," Working Papers, Federal Reserve Bank of Minneapolis 427, Federal Reserve Bank of Minneapolis.
  18. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 39-69, February.
  19. Christiano, Lawrence J, 1990. "Linear-Quadratic Approximation and Value-Function Iteration: A Comparison," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 8(1), pages 99-113, January.
  20. Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, Econometric Society, vol. 47(3), pages 727-32, May.
  21. Baxter, M. & King, R.G., 1988. "Multipliers In Equilibrium Business Cycle Models," RCER Working Papers 166, University of Rochester - Center for Economic Research (RCER).
  22. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 75(1), pages 117-27, March.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Más Política Monetaria No Convencional III: Política Fiscal
    by Jesús Fernández-Villaverde in Nada Es Gratis on 2010-09-14 21:46:59
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