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The effects of a government expenditures shock
José Brandão de Brito
E2 - Consumption, Saving, Production, Employment, and Investment
E3 - Prices, Business Fluctuations, and Cycles
Government expenditure shocks increase output and do not decrease consumption. We argue this is due to the behavior of the central bank. A basic RBC model is able to deliver this result as long as the central bank behaves as the empirical evidence suggests.