Defense Spending Cutbacks and Real Interest Rates in the Neoclassical One-Sector and Two-Sector Models
This paper uses the neoclassical one-sector and two-sector models to examine the behavior of real interest rates in response to cutbacks on defense spending on capital goods and army personnel. It is demonstrated that while a permanent decline in defense spending on capital goods and military person...
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| Format: | text |
| Language: | English |
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Institutional Knowledge at Singapore Management University
1992
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| Online Access: | https://ink.library.smu.edu.sg/soe_research/182 |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | This paper uses the neoclassical one-sector and two-sector models to examine the behavior of real interest rates in response to cutbacks on defense spending on capital goods and army personnel. It is demonstrated that while a permanent decline in defense spending on capital goods and military personnel leaves the term structure unaffected in the one-sector model, the two-sector model predicts that the short and medium term real interest rates rise to give a downward-sloping yield curve when the capital goods producing sector is relatively labor-intensive. |
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