Revisiting the Supply-Side Effects of Government Spending
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Author(s)
Angeletos, George-Marios
Panousi, Vasia
Alternative Title
Revisiting the supply side effects of government spending
Date Issued
March 2009
Journal
Journal of Monetary Economics
Publisher
Elsevier
Version
Author's final manuscript
Abstract
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.
Description
Angeletos, George-Marios, and Vasia Panousi. “Revisiting the supply side effects of government spending.” Journal of Monetary Economics 56.2 (2009): 137-153.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
http://dx.doi.org/10.1016/j.jmoneco.2008.12.010
