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 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.
HOON, Hian Teck.
Defense Spending Cutbacks and Real Interest Rates in the Neoclassical One-Sector and Two-Sector Models. (1992). Economics Letters. 39, 443-448. Research Collection School Of Economics.
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