Revisiting the Supply-Side Effects of Government Spending Under Incomplete Markets
AbstractThis paper revisits the macroeconomic effects of government consumption in the neoclassical growth model augmented with idiosyncratic investment (or entrepreneurial) risk. Under complete markets, a permanent increase in government consumption has no long-run effect on the interest rate, the capital-labor ratio, and labor productivity, while it increases work hours due to the familiar negative wealth effect. These results are upset once we allow for incomplete markets. The very same negative wealth effect now causes a reduction in risk taking and investment. This in turn leads to a lower risk-free rate and, under certain conditions, also to a lower capital-labor ratio, lower productivity and lower wages.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13136.
Date of creation: May 2007
Date of revision:
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Other versions of this item:
- Vasia Panousi & George-Marios Angeletos, 2007. "Revisiting the Supply-Side Effects of Government Spending Under Incomplete Markets," 2007 Meeting Papers 545, Society for Economic Dynamics.
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-11 (All new papers)
- NEP-DGE-2007-06-11 (Dynamic General Equilibrium)
- NEP-MAC-2007-06-11 (Macroeconomics)
- NEP-PBE-2007-06-11 (Public Economics)
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