Two essays on government spending and its effect on private consumption

We focus on the relationship between government spending and private consumption using two independent approaches. The first three chapters use a theoretical approach while the fourth chapter uses an empirical one.;The first three chapters identify channels through which changes in government spending on non-traded goods affect the private consumption of traded goods, and consequently a country's current account (CA) balance. The demand side channels are expressed as intratemporal substitution effects between current period traded and nontraded goods, intertemporal substitution effects between current and future period goods, and wealth effects on the demand for current period goods.;The supply side channels depend on the assumption regarding the economy's production regime. The first three chapters cover various regimes (temporary Keynesian unemployment, full employment, and an endowment economy) to help identify these additional channels.;The main policy implication from our theoretical chapters is that internal social objectives (such as the Composition of government spending) may have direct consequences on external fiscal objectives (such as specific CA targets). Therefore, consistent policy making requires explicit attention to these identified channels.;The empirical approach expands upon previous authors' empirical work that has estimated the relationship between the two in the US to be gross substitutes. We ask what happens to the estimated relationship if we vary the measure of government spending? Does the previous result of gross substitutes still stand? Additionally, we alter the assumed degree of public goods within the different measures of government spending to see if this also changes the previous results.;The main conclusion from the empirical work is that the relationship between government spending and private consumption is sensitive to the chosen measure of government spending. Under some measures we find gross substitutes while under others we find gross complements.;A corollary is that the components of government spending may have different individual relationships with private consumption than the relationship that appears in the aggregate. Explicit knowledge of the relationships at the lower levels may help derive a better understanding of the relationship in the aggregate, thereby leading to better policy making.