LIU Xiaochuan, WANG Litan:Household Consumption and Optimal Government Spending: Theory and Dynamic Estimates

Abstract：This paper employs Paul A. Samuelson's multiplier-accelerator interaction model to study the impact of government spending on household consumption. The result of theoretical proof shows that under the assumption indefinitely the relationship between household consumption and government spending depends on the marginal propensity to household consumption and the marginal propensity to government spending in a steady state economy. Upon empirical study, the relationship of above two shows inverted “U” relationship. Government spending generates firstly crowded-in effect on household consumption and reaches the maximum crowded-in effect on household consumption, and then generates crowed-out effect on household consumption in 2005. In the sub-test, the general public affairs and the livelihood of government spending generate separately “crowded-in effect” and “crowed-out effect” on household consumption. Economic affairs of government spending and livelihood expenditure produce crowded-out effect and crowded-in effect on the household consumption as the shape of an inverted “U” respectively. Accordingly this paper proposes several fiscal policy suggestions.

Key words： Household Consumption   Optimal Government Spending   Adaptive Expectation   Crowded-in Effect   Crowded-out Effect

source:Finance & Trade Economics ,No.7,2014