Revisiting the supply side effects of government spending

George Marios Angeletos*, Vasia Panousi

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

17 Scopus citations


We revisit the macroeconomic effects of government consumption in the neoclassical growth model when agents face uninsured idiosyncratic investment risk. Under complete markets, a permanent increase in government consumption has no long-run effect on interest rates and capital intensity, while it increases work hours due to the negative wealth effect. These results are upset once we allow for incomplete markets. The same negative wealth effect now causes a reduction in risk taking and the demand for investment. This leads to a lower risk-free rate and, under certain conditions, also to a lower capital-labor ratio and lower productivity.

Original languageEnglish (US)
Pages (from-to)137-153
Number of pages17
JournalJournal of Monetary Economics
Issue number2
StatePublished - Mar 2009


  • Entrepreneurial risk
  • Fiscal policy
  • Government spending
  • Incomplete risk sharing

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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