An empirical examination of government expenditures and the ex-ante crowding-out effect for the British economy

Abstract

The conventional macroeconomic view that consumers make their consumption decisions without regard for goods provided by the government has been examined in the literature. Moreover, the line of research that questions this conventional view argues that this separation does not have a firm theoretical backing. If consumers take government expenditures into account when maximizing their utility functions then the effects of fiscal policy actions will tend to appear weaker than those suggested by most conventional analyses. The examination of this issue should therefore have far-reaching political as well as economic implications within the context of traditional fiscal policies. This paper will empirically examine the ex antecrowding-out effect of government expenditures upon private consumption expenditures for the British economy. An aggregate consumption function is derived and estimated in the context of a simultaneous equations model based on intertemporal consumption theory. The empirical results sho...