Revisiting the Supply-Side Effects of Government Spending
نویسنده
چکیده
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 the interest rate and the capital-labor ratio, while it increases 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. JEL codes: E13, E62.
منابع مشابه
Digitized by the Internet Archive in 2011 with Funding from Boston Library Consortium Iviember Libraries Government Spending under Incomplete Markets Revisiting the Supply-side Effects of Government Spending under Incomplete Markets^
This paper revisits the macroeconomic effects of government consumption in the neoclassical growth model augmented with idiosyncratic investment (or entrepreneurial) risk. Under complete markets, a permanent increase in government consumption has no long-run effect on the interest rate, the capital-labor ratio, and labor productivity, while it increases work hours due to the familiar negative w...
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