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Government Spending and the Optimal Rates of Consumption and Capital Accumulation

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  • Slobodan Djajic

Abstract

This paper investigates the effects of a temporary change in government expendit ure on private consumption and investment. The model employed is one of a closed economy populated by infinitely-lived, utility-maximizing individuals. The analysis focuses on the implications of alternative assumptions concerning the relationship between public and private c onsumption in the household's utility function. A temporary increase in government expenditure is found to reduce investment if public and private goods are Edgeworth complements or independent. However, if they are substitutes, there exists the possibility of an increase in investment.

Suggested Citation

  • Slobodan Djajic, 1987. "Government Spending and the Optimal Rates of Consumption and Capital Accumulation," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 544-554, August.
  • Handle: RePEc:cje:issued:v:20:y:1987:i:3:p:544-54
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    Cited by:

    1. Chang, Wen-ya, 1999. "Government spending, endogenous labor, and capital accumulation," Journal of Economic Dynamics and Control, Elsevier, vol. 23(8), pages 1225-1242, August.
    2. Auteri, Monica & Costantini, Mauro, 2010. "A panel cointegration approach to estimating substitution elasticities in consumption," Economic Modelling, Elsevier, vol. 27(3), pages 782-787, May.
    3. Juan González Alegre, 2012. "An evaluation of EU regional policy. Do structural actions crowd out public spending?," Public Choice, Springer, vol. 151(1), pages 1-21, April.
    4. Turnovsky, Stephen J. & Fisher, Walter H., 1995. "The composition of government expenditure and its consequences for macroeconomic performance," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 747-786, May.
    5. Van Dalen, Hendrik P., 1995. "Intertemporal substitution in war and peace: Evidence from the United Kingdom, 1830-1990," Journal of Macroeconomics, Elsevier, vol. 17(3), pages 447-469.
    6. Shieh, Jhy-yuan & Chen, Jhy-hwa & Lai, Ching-chong, 2006. "Government spending, capital accumulation and the optimal policy rule: The role of public service capital," Economic Modelling, Elsevier, vol. 23(6), pages 875-889, December.

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