Working Paper 456

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The Output, Employment, and Interest Rate Effects of Government Consumption

S. Rao Aiyagari
Lawrence J. Christiano - Consultant
Martin Eichenbaum

Published April 1, 1990

Abstract
This paper investigates the impact on aggregate variables of changes in government consumption in the context of a stochastic, neoclassical growth model. We show, theoretically, that the impact on output and employment of a persistent change in government consumption exceeds that of 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.


Published In: Journal of Monetary Economics (Vol. 30, No. 1, October 1992, pp. 73-86)

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