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Costly Capital Reallocation and the Effects of Government Spending

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  • Valerie A. Ramey
  • Matthew D. Shapiro

Abstract

Changes in government spending often lead to significant shifts in demand across sectors. This paper analyzes the effects of sector-specific changes in government spending in a two-sector dynamic general equilibrium model in which the reallocation of capital across sectors is costly. The two-sector model leads to a richer array of possible responses of aggregate variables than the one-sector model. The empirical part of the paper estimates the effects of military buildups on a variety of macroeconomic variables using a new measure of military shocks. The behavior of macroeconomic aggregates is consistent with the predictions of a multi-sector neoclassical model. In particular, consumption, real product wages and manufacturing productivity fall in response to exogenous military buildups in the post-World War II United States.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6283.

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Date of creation: Apr 1999
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Publication status: published as Carnegie-Rochester Conference Series on Public Policy, vol. 48, 1998, pp. 1 145-194
Handle: RePEc:nbr:nberwo:6283

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