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Useful government spending, direct crowding-out and fiscal policy interdependence

By Giovanni Ganelli

Abstract

This paper introduces perfect substitutability between private and public consumption in a dynamic, open economy with imperfect competition and nominal rigidities. This implies a direct crowding-out effect that, generalising to the two-country case some well-known properties of a closed economy, tends to reduce consumption following both domestic and foreign expansions. A less expected result is that sub-stitutability has a positive effect on the short-run output spillover. We also show that, if we modify the model to allow for home bias in government spending, temporary fiscal expansions display a "quasi-neutrality" property

Topics: HJ
Publisher: University of Warwick, Department of Economics
Year: 2000
OAI identifier: oai:wrap.warwick.ac.uk:1629

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Citations

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