General Equilibrium Approach to Government Spending Effect

This paper is intended to focus on the direct effect of government expenditures on private activities in the framework of a dynamic optimizing general equilibrium model. The results show that, in the steady state, government consumption expenditures crowd out private consumption fully, on the other hand government investment expenditures raise private investment and so real output, producing a positive multiplier. The solution also shows that the larger the share of consumption components in total government spending, the more the government spending crowds out the private spending.