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.
*Published:
Journal of Monetary Economics, 1992
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