Government consumption and private investment in closed and open economies

Early versions of the equilibrium approach to fiscal policy implied that te mporary increases in public consumption reduced investment while permanent expansions left it: unchanged; current-account effects in the open economy were held to be analogous to these closed-economy investment effects. It ha s been shown recently though that these investment results arise only under very restrictive assumptions. The present paper demonstrates this in a tra nsparent fashion and extends the analysis to the open economy. Here the equ ilibrium approach has the implausible implication that fiscal expansions, w hether temporary or permanent, should "crowd in" investment.