Government Spending, Capital Accumulation and the Optimal Policy Rule: The Role of Public Service Capital

doi:10.1016/j.econmod.2006.04.004

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Title:	Government Spending, Capital Accumulation and the Optimal Policy Rule: The Role of Public Service Capital
Authors:	Shieh, Jhy-yuan;Chen, Jhy-hwa;Lai;Ching-chong
Keywords:	Government consumption expenditure;Public capital;Social welfare
Date:	2006-04-01
Issue Date:	2017-07-04 02:11:14 (UTC+8)
Publisher:	Elsevier BV
Abstract:	In this paper, we modify the Djajić [Djajić, S., 1987. “Government Spending and the Optimal Rates of Consumption and Capital Accumulation,” Canadian Journal of Economics 20, 544–554.] model in such a way that government consumption expenditure provides utility to households via the total stock of government services rather than the government consumption flow alone. By using such a framework, we show that the optimality condition for the public service capital stock is the marginal rate of substitution between public service capital and consumption that equals the intertemporal marginal rate of transformation between the two goods. In addition, we show that the relationship between private consumption and public service capital in a household's utility plays an important role in determining the transitional behavior of relevant variables. We also examine the second-best government consumption expenditure policy. By contrast, in the standard flow specification, e.g., Turnovsky and Brock [Turnovsky, S.J. and Brock, W.A., 1980. “Time Consistency and Optimal Government Policies in Perfect Foresight Equilibrium,” Journal of Public Economics 13, 183–212.], Ihori [Ihori, T., 1990. “Government Spending and Private Consumption,” Canadian Journal of Economics 23, 60–69.], and Turnovsky and Fisher [Turnovsky, S.J. and Fisher, W.H., 1995. “The Composition of Government Expenditure and its Consequences for Macroeconomic Performance,” Journal of Economic Dynamics and Control 19, 747–786.], the second-best government consumption expenditure is decided on the basis that the marginal utility of consumption is equal to the discounted sum of the marginal utility of the government's flow spending.
Relation:	Economic Modelling 23(6), p. 875-889
DOI:	10.1016/j.econmod.2006.04.004
Appears in Collections:	[Graduate Institute & Department of Economics] Journal Article

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