Revisiting the Supply-Side Effects of Government Spending Under Incomplete Markets / George-Marios Angeletos, Vasia Panousi.

Format:

Book

Author/Creator:

Angeletos, George-Marios.

Contributor:

National Bureau of Economic Research.

Panousi, Vasia.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13136.

NBER working paper series no. w13136

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

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 wealth effect. These results are upset once we allow for incomplete markets. The very same negative wealth effect now causes a reduction in risk taking and investment. This in turn leads to a lower risk-free rate and, under certain conditions, also to a lower capital-labor ratio, lower productivity and lower wages.

Notes:

Print version record

May 2007.