Understanding the Effects of a Shock to Government Purchases

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This paper investigates the consequences of an exogenous increase in U.S. government purchases. We find that in response to such a shock, employment, output, and nonresidential investment rise, while real wages, residential investment, and consumption expenditures fall. The paper argues that a simple variant of the neoclassical model which distinguishes between nonresidential and residential investment is consistent with this evidence.

Published: Review of Economic Dynamics, Vol. 2, no. 1 (January 1999): 166-206

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