Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?

January 1, 2005

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Format: Chicago

Woon Gyu Choi, and Michael B. Devereux Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?, (USA: International Monetary Fund, 2005) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper empirically explores how fiscal policy (represented by increases in government spending) has asymmetric effects on economic activity at different levels of real interest rates. It suggests that the effect of fiscal policy depends on the level of real rates, since the Ricardian effect is smaller at lower financing costs of fiscal policy. Using threshold regression models on U.S. data, the paper provides new evidence that expansionary government spending is more conducive to short-run growth when real rates are low. It also finds asymmetric effects on interest rates and inflation, and threshold effects associated with substitution between financing methods.

Subject: Expenditure, Fiscal policy, Inflation, Production growth, Real interest rates

Keywords: Aggregate demand, Confidence interval, Government spending shock, Growth rate, Nominal interest rate, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/007
Stock No:

WPIEA2005007
ISBN:

9781451860269
ISSN:

1018-5941

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