Government Purchases and Real Interest Rates
This paper examines the dynamic impact of government purchases in a simple general equilibrium model with both durable and non-durable consumer goods as well as productive capital. The model generates perhaps surprising results. In particular, increases in government purchases are shown to cause reductions in real interest rates. The model thus provides a possible explanation for the observed behavior of real interest rates around wars.
Document Object Identifier (DOI): 10.3386/w2009
Published: Mankiw, N. Gregory. "Government Purchases and Real Interest Rates." Journal of Political Economy, Vol. 95, No. 2, (April 1987), pp. 407-419.
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