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The macroeconomic effects of government spending

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  • Ching-Sheng Mao

Abstract

This paper examines the effects of government spending under both lump-sum and income tax regimes. Under a lump-sum tax financing scheme, an increase in government spending induces a rise in the real interest rate and causes labor effort and real output to increase because of the income effect. This result is reversed under an income tax regime due to the dominating wage effect. The interest rate may rise or decline under an income tax scheme, depending on the persistence of government spending.

Suggested Citation

  • Ching-Sheng Mao, 1990. "The macroeconomic effects of government spending," Economic Review, Federal Reserve Bank of Richmond, vol. 76(Sep), pages 27-37.
    • Handle: RePEc:fip:fedrer:y:1990:i:sep:p:27-37:n:v.76no.5
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    References listed on IDEAS

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    1. Aiyagari, S. Rao & Christiano, Lawrence J. & Eichenbaum, Martin, 1992. "The output, employment, and interest rate effects of government consumption," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 73-86, October.
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