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Government Spending Under Non-Separability: a Theoretical Analysis

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  • L. Marattin
  • A. Palestini

Abstract

In this paper we derive analytic implicit form conditions for the qualitative analysis of government spending multipliers and the optimal level of government spending in presence of non-separability between private and public components of aggregate demand. Using the simplest neo-classical flexible price model with no capital accumulation, we show that Edgeworth dependence is not a suitable condition to automatically assess the signs of the consumption and income multipliers, for which a more complex analysis must be carried out. We propose a detailed investigation of the form and the characteristics of the involved utility functions, which are crucial to such evaluation. We also show that if Edgeworth complementarity is strong enough, a public spending stimulus can raise at the same time private consumption and real activity. In order to reconcile our general framework with existing literature, we discuss recent examples of non-separable functional forms from the standpoint of our results, and argue that their consistency relies on specific assumptions about steady- state points.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number wp722.

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Date of creation: Nov 2010
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Handle: RePEc:bol:bodewp:wp722

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  1. Monacelli, Tommaso & Perotti, Roberto, 2008. "Fiscal Policy, Wealth Effects and Markups," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7099, C.E.P.R. Discussion Papers.
  2. Woodford, Michael, 2010. "Simple Analytics of the Government Expenditure Multiplier," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7704, C.E.P.R. Discussion Papers.
  3. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(4), pages 1329-1368, November.
  4. Robert E. Hall, 2009. "By How Much Does GDP Rise if the Government Buys More Output?," NBER Working Papers 15496, National Bureau of Economic Research, Inc.
  5. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 315-34, June.
  6. Valerie A. Ramey, 2009. "Identifying Government Spending Shocks: It's All in the Timing," NBER Working Papers 15464, National Bureau of Economic Research, Inc.
  7. Fiorito, Riccardo & Kollintzas, Tryphon, 2002. "Public Goods, Merit Goods, and the Relation Between Private and Government Consumption," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3617, C.E.P.R. Discussion Papers.
  8. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper, Federal Reserve Bank of Atlanta 2010-01, Federal Reserve Bank of Atlanta.
  9. Agustín García & Julián Ramajo, 2005. "Fiscal policy and private consumption behaviour: The Spanish case," Empirical Economics, Springer, Springer, vol. 30(1), pages 115-135, January.
  10. Bilbiie, Florin Ovidiu, 2009. "Non-Separable Preferences and Frisch Labor Supply: One Solution to a Fiscal Policy Puzzle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7484, C.E.P.R. Discussion Papers.
  11. Georgios Karras, 2012. "Trade openness and the effectiveness of fiscal policy: some empirical evidence," International Review of Economics, Springer, Springer, vol. 59(3), pages 303-313, September.
  12. Günter Coenen & Roland Straub, 2005. "Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area," IMF Working Papers, International Monetary Fund 05/159, International Monetary Fund.
  13. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
  14. Iwata, Yasuharu, 2013. "Two fiscal policy puzzles revisited: New evidence and an explanation," Journal of International Money and Finance, Elsevier, Elsevier, vol. 33(C), pages 188-207.
  15. Giovanni Ganelli, 2007. "The Effects Of Fiscal Shocks On Consumption: Reconciling Theory And Data," Manchester School, University of Manchester, University of Manchester, vol. 75(2), pages 193-209, 03.
  16. Jang-Ting Guo & Sharon G. Harrison, 2008. "Useful Government Spending and Macroeconomic (In)stability under Balanced-Budget Rules," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 10(3), pages 383-397, 06.
  17. Ganelli, Giovanni & Tervala, Juha, 2009. "Can government spending increase private consumption? The role of complementarity," Economics Letters, Elsevier, Elsevier, vol. 103(1), pages 5-7, April.
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