In a general equilibrium model with fully rational agents and built in micro-level uncertainty we show that debt financed government spending on consumption can be welfare improving at all horizons despite the fact that it inhibits the process of physical capital formation. In addition, we show...

The paper focuses on short run macroeconomic dynamics triggered by demand side shocks. In particular, the paper analyzes, in a general equilibrium framework, the impact of transitory demand side shocks on the behavior of macroeconomic variables and examines the relevance of policy instruments...