GOVERNMENT SPENDING AND CAPITAL ACCUMULATION WITH ENDOGENOUS TIME PREFERENCE

This paper extends Djajic (1987) to allow for an endogenous rate of ti me preference, and re-examines Djajic's experiment: how the optimal ra tes of private consumption and capital accumulation will respond to an unanticipated temporary expansion in government spending. The key fac tors determining the adjustment patterns are the difference between th e marginal utility of private consumption and that of public spending, the timing of policy reversion, and the relationship between private and public consumption in household utility. If private and public con sumption are Edgeworth independent, whether investment increases with the length of fiscal expansion depends on whether the marginal utility of private consumption exceeds that of public consumption.