A Comprehensive Analysis of the Response of Private Consumption to Government Spending

Funashima, Yoshito (2014): A Comprehensive Analysis of the Response of Private Consumption to Government Spending.

Abstract

This paper considers a simple model in which government spending is productive and has a complementary relationship with private consumption to study the response of the latter to government spending. We discuss how these two characteristics can yield empirical observations that indicate a positive response of private consumption to government spending. By assuming some plausible parameter settings, we use empirical evidence to demonstrate that these dual aspects of government spending, which are normally treated separately in the literature, are inseparably linked. Moreover, our findings reveal that in addition to the presence of complementarity, productivity---even if minimal---increases the likelihood of generating a positive consumption response. These results suggest that policymakers need to recognize the importance of quality of government spending rather than quantity when stimulating an economy without a decline in consumption.

• Item Type: MPRA Paper
• Language: English
• Keywords: Private consumption; Government spending; Productivity; Complementarity
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H31 - Household; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm

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