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Dynamic effects of government expenditure in a finance constrained economy: A Note

Yan Chen and Yan Zhang

MPRA Paper from University Library of Munich, Germany

Abstract: Gokan [Dynamic effects of government expenditure in a finance constrained economy, J. Econ. Theory 127 (2006) 323-333] introduces constant government expenditure (financed by labor income taxes) in Woodford's model with capital-labor substitution and investigates how local dynamics near two steady states depend upon the elasticity of substitution between capital and labor. In this paper, we show that the local dynamics will change dramatically if the government transfers its revenue to the households (workers) in a lump sum way. In particular, we question the result that the rate of money growth has no impact on the model dynamics. In a numerical example, we illustrate that the result previously obtained is not robust to the alternative assumption.

Keywords: a lump sum transfer; indeterminacy. (search for similar items in EconPapers)
JEL-codes: C62 E32 (search for similar items in EconPapers)
Date: 2009-05-09
New Economics Papers: this item is included in nep-dge and nep-mac
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