KEYNESIAN MULTIPLIERS, DIRECT CROWDING OUT, AND THE OPTIMAL PROVISIONOF PUBLIC-GOODS

This paper studies Keynesian multipliers in a macroeconomic model with monopolistic competition. We allow public and private consumption goo ds to be perfect substitutes in private utility. This enables us to st udy the effect of direct crowding out on the size of national income, profit and employment multipliers for a given rise in real public spen ding. A positive real national income multiplier is obtained if consum ers value public consumption less than private consumption. In additio n, we determine the effective marginal cost of public funds and the op timal provision of public goods, both in the short run and in the long run.