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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 expenditures 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 consumption in the household's utility function. A temporary increase in government expenditure reduces investment if public and private goods are Edgeworth complements or independent. However, if they are substitutes, there is a possibility of an increase in investment.

Suggested Citation

  • Slobodan Djajic, 1987. "Government Spending and the Optimal Rates of Consumption and Capital Accumulation," Working Papers 681, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:681
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    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. 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.

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