TY  - JOUR
AU  - Angeletos,George-Marios
AU  - Panousi,Vasia
TI  - Revisiting the Supply-Side Effects of Government Spending Under Incomplete Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13136
PY  - 2007
Y2  - May 2007
UR  - http://www.nber.org/papers/w13136
L1  - http://www.nber.org/papers/w13136.pdf
N1  - Author contact info:
George-Marios Angeletos
Department of Economics
MIT E52-251
50 Memorial Drive
Cambridge, MA  02142-1347
Tel: 617/452-3859
Fax: 617/253-1330
E-Mail: angelet@mit.edu

Vasia Panousi
Federal Reserve Board 
E-Mail: Vasia.panousi@frb.gov
AB  - This paper revisits the macroeconomic effects of government consumption in the neoclassical growth model augmented with idiosyncratic investment (or entrepreneurial) risk. Under complete markets, a permanent increase in government consumption has no long-run effect on the interest rate, the capital-labor ratio, and labor productivity, while it increases work hours due to the familiar negative wealth effect. These results are upset once we allow for incomplete markets. The very same negative wealth effect now causes a reduction in risk taking and investment.  This in turn leads to a lower risk-free rate and, under certain conditions, also to a lower capital-labor ratio, lower productivity and lower wages.
ER  -