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

S. Rao Aiyagari*, Lawrence J. Christiano, Martin Eichenbaum

*Corresponding author for this work

Research output: Contribution to journalArticle

133 Scopus citations

Abstract

We study the impact on aggregate variables of changes in government consumption using the neoclassical stochastic 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.

Original languageEnglish (US)
Pages (from-to)73-86
Number of pages14
JournalJournal of Monetary Economics
Volume30
Issue number1
DOIs
StatePublished - Oct 1992

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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