TITLE:
A Comprehensive Analysis of the Response of Private Consumption to Government Spending
AUTHORS:
Yoshito Funashima
KEYWORDS:
Private Consumption, Government Spending, Productivity, Complementarity
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.7,
November
27,
2017
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 demonstrate that these dual aspects of
government spending, which are normally treated separately in the literature,
are inseparably linked. Our findings reveal that in addition to the presence of
complementarity, productivity—even if minimal—increases the likelihood of
generating a positive consumption response.