Public-Private Consumption Tradeoffs and the Balanced Budget Multiplier

Abstract

This paper considers consumers who have multiperiod utility functions that have private and public goods as arguments. The paper analyzes the effect on private demands of various exogenous balanced budget changes in the path of public expenditure: temporary, permanent, and countercyclical. The effects of temporary and countercyclical changes depend upon whether public and private goods are complements or substitutes and whether public goods are over- or undersupplied. The largest impact comes from countercyclical changes in undersupplied complementary public goods. Permanent changes tend to have a smaller impact but are harder to specify, since the results crucially depend upon the third derivatives of utility functions.