GOVERNMENT PURCHASES AND REAL INTEREST-RATES WITH ENDOGENOUS LABOR SUPPLY

Within the one-sector optimal growth framework with public services an d labour-leisure choice, we find that the effects of temporary product ive government spending on the real interest rate depend on the discre pancy between actual and optimal government sizes as well as on the le ngth of the action lag. This paper thus sheds light on the controversy between the empirical findings and the theoretical predictions regard ing the behaviour of the real interest rate within the neoclassical fr amework.