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The output, employment, and interest rate effects of government consumption

Author

Listed:
  • S. Rao Aiyagari
  • Lawrence J. Christiano
  • Martin Eichenbaum

Abstract

This paper investigates the impact of aggregate variables of changes in government consumption in the context of a stochastic, neoclassical growth model. We show, theoretically, that the impact on output and employment of a persistent change in government consumption exceeds that of a temporary change. We also show that, in principle, there can be an analog to the Keynesian multiplier in the neoclassical growth model. Finally, in an empirically plausible version of the model, we show that the interest rate impact of a persistent government consumption shock exceeds that of a temporary one. Our results provide counterexamples to existing claims in the literature.

Suggested Citation

  • S. Rao Aiyagari & Lawrence J. Christiano & Martin Eichenbaum, 1990. "The output, employment, and interest rate effects of government consumption," Discussion Paper / Institute for Empirical Macroeconomics 25, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmem:25
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    References listed on IDEAS

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    9. Lawrence J. Christiano & Martin Eichenbaum, 1988. "Is Theory Really Ahead of Measurement? Current Real Business Cycle Theories and Aggregate Labor Market Fluctuations," NBER Working Papers 2700, National Bureau of Economic Research, Inc.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Más Política Monetaria No Convencional III: Política Fiscal
      by Jesús Fernández-Villaverde in Nada Es Gratis on 2010-09-15 02:46:59

    Citations

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    Cited by:

    1. Jordi Gali & J. David Lopez-Salido & Javier Valles, 2003. "Understanding the effects of government spending on consumption," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    2. Louis Phaneuf & Jang-Ok Cho, 1992. "A Business Cycle Model with Nominal Wage Contracts and Government," Cahiers de recherche CREFE / CREFE Working Papers 6, CREFE, Université du Québec à Montréal, revised Jan 1993.
    3. Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, March.
    4. Dekle, Robert & Vandenbroucke, Guillaume, 2012. "A quantitative analysis of China's structural transformation," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 119-135.
    5. Funashima, Yoshito & Ohtsuka, Yoshihiro, 2019. "Spatial crowding-out and crowding-in effects of government spending on the private sector in Japan," Regional Science and Urban Economics, Elsevier, vol. 75(C), pages 35-48.
    6. Wendy Edelberg & Martin Eichenbaum & Jonas D.M. Fisher, 1999. "Understanding the Effects of a Shock to Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 166-206, January.
    7. Ant󮩯 Afonso & Ricardo M. Sousa, 2012. "The macroeconomic effects of fiscal policy," Applied Economics, Taylor & Francis Journals, vol. 44(34), pages 4439-4454, December.
    8. Malik, Ali K., 2013. "The effects of fiscal spending shocks on the performance of simple monetary policy rules," Economic Modelling, Elsevier, vol. 30(C), pages 643-662.
    9. P J Pérez, 2001. "Cyclical Properties in the Main Western Economies," Centre for Growth and Business Cycle Research Discussion Paper Series 33, Economics, The Univeristy of Manchester.
    10. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March.
    11. Charles T. Carlstrom & Jagadeesh Gokhale, 1991. "Government consumption, taxation, and economic activity," Economic Review, Federal Reserve Bank of Cleveland, vol. 27(Q III), pages 18-29.
    12. Funashima, Yoshito, 2014. "A Comprehensive Analysis of the Response of Private Consumption to Government Spending," MPRA Paper 59968, University Library of Munich, Germany.
    13. Gabriel Caldas Montes & Iven Silva Valpassos, 2018. "Discretionary fiscal policy and sovereign risk," Economics Bulletin, AccessEcon, vol. 38(3), pages 1343-1365.
    14. Robert Dekle & Guillaume Vandenbroucke, 2006. "A quantitative analysis of China’s structural transformation," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    15. Davide Furceri & Ricardo M. Sousa, 2011. "Does Government Spending Crowd Out Private Consumption and Investment?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 12(4), pages 153-170, October.
    16. Michael Dotsey & Ching Sheng Mo, 1994. "The effects of fiscal policy in a neoclassical growth model," Working Paper 94-03, Federal Reserve Bank of Richmond, revised 1994.
    17. Davide Furceri & Ricardo M. Sousa, 2009. "The Impact of Government Spending on the Private Sector: Crowding-out versus Crowding-in Effects"," NIPE Working Papers 6/2009, NIPE - Universidade do Minho.
    18. John C. Anyanwu, 2013. "Characteristics and Macroeconomic Determinants of Youth Employment in Africa," African Development Review, African Development Bank, vol. 25(2), pages 107-129, June.

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