Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?
IMF Working Papers, January 1, 2005
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Bibliographic details
- Authors: Woon Gyu Choi, Michael B. Devereux
- Published: January 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451860269.001
Summary and core findings
- 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.
- Suggests 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, finds that expansionary government spending is more conducive to short-run growth when real rates are low.
- Finds asymmetric effects on interest rates and inflation.
- Identifies threshold effects associated with substitution between financing methods.
Methodology
- Empirical approach: threshold regression models.
- Data scope: U.S. data (as analyzed in the paper).
Implications and interpretation
- Fiscal multipliers and short-run growth impacts of government spending vary with the prevailing real interest rate environment.
- Lower real rates reduce the Ricardian offset, increasing the short-run effectiveness of expansionary government spending.
- Asymmetric policy outcomes include differential responses of interest rates and inflation depending on real rate thresholds.
- Substitution between financing methods exhibits threshold behavior, implying financing composition matters for fiscal transmission.