The composition of government expenditure and its consequences for macroeconomic performance

Abstract This paper employs the intertemporal optimizing market-clearing framework to compare the effects of government consumption expenditure and government infrastructure expenditure on macroeconomic adjustment and performance. Particular attention is focused on the time path of the capital stock and its adjustment to both permanent and temporary changes in government expenditure are considered. We show how the effects of both forms of government expenditure on economic welfare can be broken down into: 1. (i) a direct crowding-out effect and 2. (ii) a second component which describes the intertemporal tradeoffs between the short-run rate of capital accumulation and the resulting change in the capital stock.

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