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 re sponse 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.