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

S. Rao Aiyagari; Lawrence J. Christiano; Martin Eichenbaum

doi:10.1016/0304-3932(92)90045-4

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

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

^*Corresponding author for this work

Economics

Research output: Contribution to journal › Article › peer-review

168 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 language	English (US)
Pages (from-to)	73-86
Number of pages	14
Journal	Journal of Monetary Economics
Volume	30
Issue number	1
DOIs	https://doi.org/10.1016/0304-3932(92)90045-4
State	Published - Oct 1992

Funding

*We are grateful to Lars Hansen for helpful comments. Christian0 and Eichenbaum acknowledge research support from the National Science Foundation. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve Bank of Chicago, or the Federal Reserve System.

ASJC Scopus subject areas

Finance
Economics and Econometrics

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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.",

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note = "Funding Information: *We are grateful to Lars Hansen for helpful comments. Christian0 and Eichenbaum acknowledge research support from the National Science Foundation. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve Bank of Chicago, or the Federal Reserve System.",

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AB - 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.

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

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