Revisiting the supply side effects of government spending under incomplete markets
By: George-Marios Angeletos [and][ Vasia Panousi
Contributors: Panousi, Vasia; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 07-18; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 07-18.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2007
Place of publication: Cambridge, MA
Language: eng
Number of pages: 30
Description: 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. Keywords: Fiscal policy, government spending, incomplete risk sharing, entrepreneurial risk. JEL Classifications: E13, E62.
Notes: "May 4, 2007."

Includes bibliographical references (p. 28-30).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.