Government Spending and the Optimal Rates of Consumption and Capital Accumulation

Slobodan Djajic

Canadian Journal of Economics, 1987, vol. 20, issue 3, 544-54

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.

Date: 1987
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