NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

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

NBER Working Paper No. 3330
Issued in April 1990
NBER Program(s):   EFG

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 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 counter examples to existing claims in the literature.

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Published: Journal of Monetary Economics, 1992

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