TY - JOUR
T1 - Revisiting the supply side effects of government spending
AU - Angeletos, George Marios
AU - Panousi, Vasia
N1 - Funding Information:
We are grateful to the editor, Robert King, and an anonymous referee for their feedback and suggestions on how to improve the paper. We also thank Olivier Blanchard, Chris Carroll, Edouard Challe, Ricardo Caballero, Mike Golosov, Ricardo Reis, Iván Werning and seminar participants at MIT, the 2007 conference on macroeconomic heterogeneity at the Paris School of Economics, and the 2007 SED annual meeting for useful comments. Angeletos thanks the Alfred P. Sloan Foundation for a Sloan Research Fellowship that supported this work. The views presented are solely those of the authors and do not necessarily represent those of the Board of Governors of the Federal Reserve System or its staff members.
PY - 2009/3
Y1 - 2009/3
N2 - 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.
AB - 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.
KW - Entrepreneurial risk
KW - Fiscal policy
KW - Government spending
KW - Incomplete risk sharing
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U2 - 10.1016/j.jmoneco.2008.12.010
DO - 10.1016/j.jmoneco.2008.12.010
M3 - Article
AN - SCOPUS:61849084720
SN - 0304-3932
VL - 56
SP - 137
EP - 153
JO - Carnegie-Rochester Confer. Series on Public Policy
JF - Carnegie-Rochester Confer. Series on Public Policy
IS - 2
ER -