Working Paper: NBER ID: w2009
Authors: N. Gregory Mankiw
Abstract: This paper examines the dynamic impact of government purchases in a simple general equilibrium model with both durable and non-durable consumer goods as well as productive capital. The model generates perhaps surprising results. In particular, increases in government purchases are shown to cause reductions in real interest rates. The model thus provides a possible explanation for the observed behavior of real interest rates around wars.
Keywords: government purchases; real interest rates; neoclassical growth model
JEL Codes: E62; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Permanent increase in government purchases (E62) | Decrease in real interest rates (E43) |
| Permanent increase in government purchases (E62) | Increase in marginal utility of consumption (D11) |
| Increase in marginal utility of consumption (D11) | Decrease in real interest rates (E43) |
| Temporary increase in government purchases (E62) | Contemporaneous short-term interest rate falls (E43) |
| Temporary increase in government purchases (E62) | Some forward rates rise (E43) |
| Permanent increase in government purchases (E62) | Long-term interest rate falls (E43) |