Government spending under non-separability: a theoretical analysis

Luigi Marattin and Arsen Palestini ()

International Review of Economics, 2014, vol. 61, issue 1, 39-60

Abstract: We derive analytic implicit form conditions for the qualitative analysis of government spending multipliers and the optimal level of government spending in presence of non-separability between private and public components of aggregate demand. Using the simplest neo-classical flexible price model with no capital accumulation, we show that Edgeworth dependence is not a suitable condition to automatically assess the signs of the consumption and output multipliers, for which a more complex analysis must be carried out. We propose a detailed investigation of the form and the characteristics of the involved utility functions, which are crucial to such evaluation. We also show that if Edgeworth complementarity is strong enough, a public spending stimulus can raise at the same time private consumption and real activity. In order to reconcile our general framework with existing literature, we discuss recent examples of non-separable functional forms from the standpoint of our results, and argue that their consistency relies on specific assumptions about steady-state points. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Government spending; Consumption multiplier; Output multiplier; E12; E21; H50 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Government Spending Under Non-Separability: a Theoretical Analysis (2010)
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DOI: 10.1007/s12232-013-0187-z

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