ments and suggestions. The authors are also grateful to seminar participants at the 2004 Far Eastern Meeting of the Econometric Society in Seoul for useful comments and discussions.

This paper empirically explores how fiscal policy (represented by increases in government spending) has asymmetric effects on economic activity across differ-ent levels of real interest rates. It suggests that the effect of fiscal policy depends on the level of real rates because the Ricardian effect is smaller at lower financing costs of fiscal policy. Using threshold vector autoregression models on U.S. data, the paper provides new evidence that expansionary government spending is more con-ducive to short-term growth when real rates are low. It also finds asymmetric effects on interest rates and inflation and threshold effects associated with substitution between financing methods. [JEL C32, C51, E62] Postwar U.S. data exhibit substantial fluctuations in real interest rates. Changesin real interest rates affect the cost of financing government spending and the burden of future fiscal consolidation. This implies that the effects of fiscal policy may depend on the level of real rates. In particular, fiscal policy may be less expansionary in an environment of high real rates because a number of channels (discussed below) limit the effectiveness of fiscal policy when the burden of financ-ing is increased. This paper empirically examines how the effects of fiscal policy (represented by increases in government spending) differ across different levels of real rates