Productive government spending and private consumption: a pessimistic view

This paper analyses the consequences of productive government spending on private consumption. In a related work, Linnemann and Schabert (2006) found that a moderate output elasticity of government expenditures is sufficient to generate a positive consumption response to a fiscal shock. It is shown in this paper that pessimism as to the ability of productive government spending to account for an empirically observed positive consumption response is in order because a balanced budget increase in government spending increases private consumption only if the productivity of government spending is relatively high. For realistic values of the output elasticity of government spending, a positive consumption response is ruled out.