Government Spending Under Non-Separability: a Theoretical Analysis
University of Bologna - Department of Economics
MEMOTEF - Sapienza University of Rome
November 28, 2010
Quaderni - Working Paper DSE No. 722
In this paper 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 utomatically assess the signs of the consumption and income 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 speci c assumptions about steady- state points.
Number of Pages in PDF File: 30
Keywords: Edgeworth Complementarity/Substitutability, Consumption Multiplier, Output Multiplier, Bundle Function
JEL Classification: E20, H50working papers series
Date posted: December 3, 2010 ; Last revised: April 28, 2012
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