Can fiscal spending be contractionary when interest rates have supply-side effects?

Can increased government spending cause a temporary recession? The answer is yes, if there exist direct aggregate supply-side effects of interest rates. Existing studies of this issue are incomplete for two reasons. First, the aggregate-demand and aggregate-supply effects of interest rates are not specified within an internally consistent framework and so cannot be compared properly. Second, interest rate expectations effects are ignored. This paper eliminates both these shortcomings and therefore better establishes the empirical relevance of the supply-side effects of interest rates. Nominal interest rates above 6% are sufficient for fiscal policy perversity.