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Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?

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  • Michael B. Devereux
  • Woon Gyu Choi

Abstract

This paper examines empirical issues on asymmetric effects of government spending. Increases in government spending under low real interest rates are not associated with the same increases in future tax liabilities as those under high real interest rates. Consequently, the negative impact from the Ricardian effect is smaller with lower real rates. Our empirical work on US data, using threshold regression models, provides new evidence that an expansionary government spending is more conducive to real activities when real rates are low. We also find asymmetric effects on interest rates and threshold effects associated with substitution between financing methods.

Suggested Citation

  • Michael B. Devereux & Woon Gyu Choi, 2004. "Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?," Econometric Society 2004 Far Eastern Meetings 666, Econometric Society.
  • Handle: RePEc:ecm:feam04:666
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Troy Davig & Eric M. Leeper, 2008. "Endogenous Monetary Policy Regime Change," NBER Chapters,in: NBER International Seminar on Macroeconomics 2006, pages 345-391 National Bureau of Economic Research, Inc.
    2. Andreas G. Georgantopoulos & Anastasios D. Tsamis, 2012. "The Interrelationship between Money Supply, Prices and Government Expenditures and Economic Growth: A Causality Analysis for the Case of Cyprus," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 5(3), pages 115-128, December.
    3. Woon Gyu Choi, 2007. "Measuring Interest Rates as Determined by Thrift and Productivity," Annals of Economics and Finance, Society for AEF, vol. 8(1), pages 167-195, May.
    4. Daniel Choi & Mark Holmes, 2014. "Budget deficits and real interest rates: a regime-switching reflection on Ricardian Equivalence," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(1), pages 71-83, January.
    5. Kameda, Keigo, 2014. "What causes changes in the effects of fiscal policy? A case study of Japan," Japan and the World Economy, Elsevier, vol. 31(C), pages 14-31.

    More about this item

    Keywords

    fiscal policy; government spending; Ricardian equivalence; real interest rates; regime switching; threshold vector autoregression;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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