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Costly capital reallocation and the effects of government spending

  • Ramey, Valerie A.
  • Shapiro, Matthew D.

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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Article provided by Elsevier in its journal Carnegie-Rochester Conference Series on Public Policy.

Volume (Year): 48 (1998)
Issue (Month): 1 (June)
Pages: 145-194

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Handle: RePEc:eee:crcspp:v:48:y:1998:i::p:145-194
Contact details of provider: Web page: http://www.elsevier.com/locate/jme

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