Government Purchases and Real Interest Rates with Endogenous Labour Supply

Theodore Palivos and Chong Yip

The Economic Record, 1996, vol. 72, issue 219, 332-340

Abstract: Within the one‐sector optimal growth framework with public services and labour‐leisure choice, we find that the effects of temporary productive government spending on the real interest rate depend on the discrepancy between actual and optimal government sizes as well as on the length of the action lag. This paper thus sheds light on the controversy between the empirical findings and the theoretical predictions regarding the behaviour of the real interest rate within the neoclassical framework.

Date: 1996
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