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Asymmetric Effects of Government Spending

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  • Woon Gyu Choi
  • Michael B. Devereux

Abstract

This paper empirically explores how fiscal policy (represented by increases in government spending) has asymmetric effects on economic activity at different levels of real interest rates. It suggests that the effect of fiscal policy depends on the level of real rates, since the Ricardian effect is smaller at lower financing costs of fiscal policy. Using threshold regression models on U.S. data, the paper provides new evidence that expansionary government spending is more conducive to short-run 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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/7.

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Length: 36
Date of creation: 01 Jan 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/7

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Keywords: Real interest rates; Government expenditures; Economic models; government spending; inflation; fiscal policy; real rates; aggregate demand; real interest rate; fiscal expansion; monetary policy; defense spending; nominal interest rates; expansionary fiscal; money growth; fiscal adjustment; nominal interest rate; public debt; fiscal contraction; price level; monetary base; budget deficits; gdp deflator; fiscal impetus; expansionary fiscal contraction; fiscal consolidation; monetary economics; inflation equation; high inflation; tax rates; inflation rate; expansionary fiscal policy; fiscal austerity; government spending shocks; money stock; fiscal adjustments; budget deficit; fiscal contractions; tax policy; fiscal deficits; inflation process; actual inflation; fiscal stabilization; fiscal stabilizers; fiscal shocks; price inflation; high inflations; expenditure composition; fiscal stance; fiscal stabilization policies; fiscal shock; expansionary fiscal stance; public debt reverse; fiscal position; fiscal measures; macroeconomic stability; fiscal stress; public finance; monetary aggregate; rate of inflation; fiscal debt; cuts in government spending; fiscal multiplier; fiscal crises; tax liability; real money; high interest rates; fiscal debt burden; fiscal crisis; fiscal balance; public expenditure; discretionary fiscal policy;

This paper has been announced in the following NEP Reports:

References

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  1. Jushan Bai, 1995. "Estimating Multiple Breaks One at a Time," Working papers 95-18, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Sutherland, Alan, 1995. "Fiscal Crises and Aggregate Demand: Can High Public Debt Reverse the Effects of Fiscal Policy?," CEPR Discussion Papers 1246, C.E.P.R. Discussion Papers.
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  25. repec:cup:etheor:v:13:y:1997:i:3:p:315-52 is not listed on IDEAS
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  27. Pesaran, H.M. & Potter, S.M., 1995. "A Floor and Ceiling Model of U.S. Output," Cambridge Working Papers in Economics 9407, Faculty of Economics, University of Cambridge.
  28. Mankiw, N Gregory, 1987. "Government Purchases and Real Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 407-19, April.
  29. Evans, Paul & Karras, Georgios, 1998. "Liquidity Constraints and the Substitutability between Private and Government Consumption: The Role of Military and Non-military Spending," Economic Inquiry, Western Economic Association International, vol. 36(2), pages 203-14, April.
  30. Dwyer, Gerald P, Jr, 1982. "Inflation and Government Deficits," Economic Inquiry, Western Economic Association International, vol. 20(3), pages 315-29, July.
  31. Devereux, Michael B & Love, David R F, 1995. "The Dynamic Effects of Government Spending Policies in a Two-Sector Endogenous Growth Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 232-56, February.
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Cited by:
  1. Troy Davig & Eric Leeper, 2006. "Endogenous monetary policy regime change," Research Working Paper RWP 06-11, Federal Reserve Bank of Kansas City.

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