Public investment in infrastructure and the like do not usually yield direct pecuniary returns to the public exchequer. Instead public capital leads to increases in factor productivity in the private economy. This paper argues that government typically shares in the latter gains via the...

We propose a model with involuntary unemployment, incomplete markets, and nominal rigidity, in which the effects of government spending are state-dependent. An increase in government purchases raises aggregate demand, tightens the labor market and reduces unemployment. This in turn lowers...