Government spending, interest rates, and capital accumulation in a two-sector model
This paper investigates dynamic impacts of a temporary fiscal expansion in a two-sector growth model. If the expansion falls on consumption-investment commodities, capital accumulation can be either promoted or reduced and the short-term interest rate unambiguously rises. If the expansion falls on consumption commodities, capital accumulation is crowded out and the short-term interest rate declines during the period of the fiscal expansion. It is also shown that fiscal spending on the consumption commodity can move the short- and long-term interest rates in opposite directions.
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Volume (Year): 34 (2001)
Issue (Month): 4 (November)
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