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Utility-generating government spending and (in)determinacy in a two-sector model

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  • Dou Jiang

Abstract

This study quantitatively examines the role of utility-generating government spending in achieving economic (in)determinacy within a two-sector framework. In the model, the government allocates expenditures to two types of commodities: consumption and investment goods. It is assumed that government spending on both goods generates externalities in preferences. The key findings are as follows. When private consumption and public spending are complements in the utility function, the results diverge from those of the one-sector model counterpart: stronger external effects of government spending reduce the likelihood of indeterminacy. Conversely, when private consumption and public spending are Edgeworth substitutes, the economy becomes more susceptible to belief-driven fluctuations. Furthermore, the artificial sunspot-driven business cycles generated by the model align with most of the U.S. stylized facts.

Suggested Citation

  • Dou Jiang, 2026. "Utility-generating government spending and (in)determinacy in a two-sector model," Applied Economics, Taylor & Francis Journals, vol. 58(11), pages 2136-2154, March.
    • Handle: RePEc:taf:applec:v:58:y:2026:i:11:p:2136-2154
    DOI: 10.1080/00036846.2025.2473117
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