Rethinking the macroeconomic impacts of government spending policy

This thesis consists of three essays. In the first essay, " Government Spending Shocks and the Real Interest Rate under Alternative Fiscal Regimes", I consider the effects of temporary and permanent government spending shocks on the real rate, in a framework that encompasses sticky prices and allows for the presence of either a standard "Ricardian" regime, or of a "non-Ricardian" regime in which prices and real interest rates adjust in equilibrium to the needs of fiscal solvency. I show that the behavior of the real rate in response to a public spending shock will depend, under certain circumstances, on the type of fiscal rule adopted by the government. The empirical evidence for the United States reported in the essay is suggestive of a negative relationship between the real rate and permanent changes in government spending, and of a positive relationship between the real rate and temporary government spending movements. This evidence is then interpreted in the light of the theoretical framework, with special reference to its implications for assessing the type of fiscal regime that is actually in place.;In the second essay, "Fiscal Retrenchments and the Level of Economic Activity", I analyze from a theoretical perspective the effects of a permanent decrease in government spending on output. While a positive fiscal multiplier has long been part of macroeconomists' core beliefs, there is a fair amount of empirical evidence for OECD countries over the last two decades which suggests that fiscal contractions can have expansionary effects. In the context of a stylized general equilibrium model, I show that while a reduction in current government spending has the usual contractionary effects on current output, expected future cuts in government spending can generate an increase in the current level of economic activity, provided that nominal rigidities are present. In an otherwise identical setup, perfectly flexible prices would not allow future declines in government spending to have, other things equal, an expansionary effect.;In the last essay, "Anticipated Future Productivity Shocks, Investment, and the Real Rate", I ask the question of whether, from a theoretical standpoint, current investment and the real interest rate can simultaneously increase in the presence of a favorable shift in future productivity. A standard general equilibrium real model would predict, for plausible values of the intertemporal elasticity of substitution in consumption, a rise in the real rate, together with a decline in investment. It is shown that such conclusion is unwarranted when nominal rigidities are introduced into the analysis. In contrast with the flexible price case, the increase in expected future productivity generates a surge in current output, which allows for the possibility for investment to increase when adjustment costs to the capital stock are present. The essay thus provides a theoretical support for the view that high world investment and world real rates during the early 1980s were driven by a favorable shift in future profitability.;All the three essays use as a theoretical framework a dynamic general equilibrium model which allows for the presence of nominal rigidities, and they provide another example of how sticky-price dynamics change the economy's response to government spending and productivity shocks, showing that the answer can differ, sometimes in a surprising way, from those offered by a standard flexible-price model.