This paper studies four classic fiscal-policy experiments within a quantitatively restricted neoclassical model. Our main findings are as follows: (i) permanent changes in government purchases can lead to short-run and long-run output multipliers that exceed 1; (ii) permanent changes in government purchases induce larger effects than temporary changes; (iii) the financing decision is quantitatively more important than the resource cost of changes in government purchases; and (iv) public investment has dramatic effects on private output and investment. These findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy.

Neoclassical transitional dynamics are a central element of standard macroeconomic theory. Quantitative experiments with the fixed-savings-rate models of the 1960's showed lengthy transitions, thus potentially rationalizing sustained differences in growth rates across countries. We investigate quantitative transitional dynamics in various neoclassical models with intertemporally optimizing households. Lengthy transitions occur only with very low intertemporal substitution. Generally, when one tries to explain sustained economic growth with transitional dynamics, there are extremely counterfactual implications. These result from the fact that implied marginal products are extraordinarily high in the early stages of development.