Costly Capital Reallocation and the Effects of Government Spending

Valerie Ann Ramey () and Matthew D. Shapiro

No 6283, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Changes in government spending often lead to significant shifts in demand across sectors. This paper analyzes the effects of sector-specific changes in government spending in a two-sector dynamic general equilibrium model in which the reallocation of capital across sectors is costly. The two-sector model leads to a richer array of possible responses of aggregate variables than the one-sector model. The empirical part of the paper estimates the effects of military buildups on a variety of macroeconomic variables using a new measure of military shocks. The behavior of macroeconomic aggregates is consistent with the predictions of a multi-sector neoclassical model. In particular, consumption, real product wages and manufacturing productivity fall in response to exogenous military buildups in the post-World War II United States.

JEL-codes: E62 E13 (search for similar items in EconPapers)
Date: 1999-04
Note: EFG
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Journal Article: Costly capital reallocation and the effects of government spending (1998)
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