FISCAL-POLICY IN GENERAL EQUILIBRIUM

This paper studies four classic fiscal-policy experiments within a qua ntitatively restricted neoclassical model. Our main findings are as fo llows: (i) permanent changes in government purchases can lead to short -run and long-run output multipliers that exceed 1; (ii) permanent cha nges in government purchases induce larger effects than temporary chan ges; (iii) the financing decision is quantitatively more important tha n the resource cost of changes in government purchases, and (iv) publi c investment has dramatic effects on private output and investment. Th ese findings stem from important dynamic interactions of capital and l abor absent in earlier equilibrium analyses of fiscal policy.