Impact of Government Spending on Private Consumption and on the Economy: Case of Thailand
The recent global financial problem urges government
to play role in stimulating the economy due to the fact that private
sector has little ability to purchase during the recession. A concerned
question is whether the increased government spending crowds out
private consumption and whether it helps stimulate the economy. If
the government spending policy is effective; the private consumption
is expected to increase and can compensate the recent extra
government expense. In this study, the government spending is
categorized into government consumption spending and government
capital spending. The study firstly examines consumer consumption
along the line with the demand function in microeconomic theory.
Three categories of private consumption are used in the study. Those
are food consumption, non food consumption, and services
consumption. The dynamic Almost Ideal Demand System of the three
categories of the private consumption is estimated using the Vector
Error Correction Mechanism model. The estimated model indicates
the substituting effects (negative impacts) of the government
consumption spending on budget shares of private non food
consumption and of the government capital spending on budget share
of private food consumption, respectively. Nevertheless the result
does not necessarily indicate whether the negative effects of changes
in the budget shares of the non food and the food consumption means
fallen total private consumption. Microeconomic consumer demand
analysis clearly indicates changes in component structure of
aggregate expenditure in the economy as a result of the government
spending policy. The macroeconomic concept of aggregate demand
comprising consumption, investment, government spending (the
government consumption spending and the government capital
spending), export, and import are used to estimate for their
relationship using the Vector Error Correction Mechanism model.
The macroeconomic study found no effect of the government capital
spending on either the private consumption or the growth of GDP
while the government consumption spending has negative effect on
the growth of GDP. Therefore no crowding out effect of the
government spending is found on the private consumption but it is
ineffective and even inefficient expenditure as found reducing growth
of the GDP in the context of Thailand.
[1] Pieroni, L. 2009. "Does Defend Expenditure Affect Private
Consumption? Evidence from the United States", Economic Modelling,
26: 1300-1309.
[2] Deaton, A.S., and Muellbauer, J., 1980. An Almost Ideal Demand
System, American Economic Review, 70, 312 - 326.
[3] Akmal, M. and Stern, D.I., 2001. "The Structure of Australian
Residential Energy Demand", Working Papers in Ecological
Economics no. 0101, The Australian National University.
[4] Anderson, G. and Blundell, R., 1983. Testing Restrictions in a Flexible
Dynamic Demand System: An Application to Consumer Demand in
Canada, Review of Economic Studies, 50, pp. 397-410.
[5] Blundell, R. 1988. "Consumer Behaviour: Theory and Empirical
Evidence- -A Survey", The Economic Journal. 98 (389), pp. 16-65.
[6] Pesaran, M.H. and Y. Shin, 1999. "Long Run Structural Modelling",
DAE Working Paper No. 9419. University of Cambridge.
[7] Tridimas, G.,2000. "The Analysis of Consumer Demand in Greece.
Model Selection and dynamic Specification", Economic Modelling 17:
455-471.
[8] Woodford, M. "Simple Analytics of the Government Expenditure
Multiplier", NBER Working Paper No. 15714, January 2010.
[9] Fatas, A. and Mihov, I., 2001. The Effects of Fiscal Policy on
Consumption and Employment: Theory and Evidence. CEPR
Discussion Paper no. 2760.
[10] Blanchard, O. and Perotti, R., 1999. "An Empirical Characterization of
the Dynamic Effects of Changes in Government Spending and Taxes on
Output". NBER Working Paper no. 2685.
[11] Heppke-Falk, K.H., Tenhofen, J., and Wolff, G.B. 2006. "The
Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany:
A Disaggregate SVAR Analysis", Discussion Paper Series 1, Economic
Studies, no. 41, Deutsche Bundesbank.
[12] Werner, R.A. 2004. "Why has Fiscal Policy Disappointed in Japan-
Revisiting the Pre-Keynesian View on the Ineffectiveness of Fiscal
Policy", Sophia University and University of Southampton, available
online at <http://repec.org/mmfc04/9.pdf> accessed on 8 February
2010.
[13] Capet, S., 2004. "The Efficiency of Fiscal Policies: A Survey of the
Literature. CEPII Working Paper, no. 2004/11. Sepatember.
[1] Pieroni, L. 2009. "Does Defend Expenditure Affect Private
Consumption? Evidence from the United States", Economic Modelling,
26: 1300-1309.
[2] Deaton, A.S., and Muellbauer, J., 1980. An Almost Ideal Demand
System, American Economic Review, 70, 312 - 326.
[3] Akmal, M. and Stern, D.I., 2001. "The Structure of Australian
Residential Energy Demand", Working Papers in Ecological
Economics no. 0101, The Australian National University.
[4] Anderson, G. and Blundell, R., 1983. Testing Restrictions in a Flexible
Dynamic Demand System: An Application to Consumer Demand in
Canada, Review of Economic Studies, 50, pp. 397-410.
[5] Blundell, R. 1988. "Consumer Behaviour: Theory and Empirical
Evidence- -A Survey", The Economic Journal. 98 (389), pp. 16-65.
[6] Pesaran, M.H. and Y. Shin, 1999. "Long Run Structural Modelling",
DAE Working Paper No. 9419. University of Cambridge.
[7] Tridimas, G.,2000. "The Analysis of Consumer Demand in Greece.
Model Selection and dynamic Specification", Economic Modelling 17:
455-471.
[8] Woodford, M. "Simple Analytics of the Government Expenditure
Multiplier", NBER Working Paper No. 15714, January 2010.
[9] Fatas, A. and Mihov, I., 2001. The Effects of Fiscal Policy on
Consumption and Employment: Theory and Evidence. CEPR
Discussion Paper no. 2760.
[10] Blanchard, O. and Perotti, R., 1999. "An Empirical Characterization of
the Dynamic Effects of Changes in Government Spending and Taxes on
Output". NBER Working Paper no. 2685.
[11] Heppke-Falk, K.H., Tenhofen, J., and Wolff, G.B. 2006. "The
Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany:
A Disaggregate SVAR Analysis", Discussion Paper Series 1, Economic
Studies, no. 41, Deutsche Bundesbank.
[12] Werner, R.A. 2004. "Why has Fiscal Policy Disappointed in Japan-
Revisiting the Pre-Keynesian View on the Ineffectiveness of Fiscal
Policy", Sophia University and University of Southampton, available
online at <http://repec.org/mmfc04/9.pdf> accessed on 8 February
2010.
[13] Capet, S., 2004. "The Efficiency of Fiscal Policies: A Survey of the
Literature. CEPII Working Paper, no. 2004/11. Sepatember.
@article{"International Journal of Business, Human and Social Sciences:57558", author = "Paitoon Kraipornsak", title = "Impact of Government Spending on Private Consumption and on the Economy: Case of Thailand", abstract = "The recent global financial problem urges government
to play role in stimulating the economy due to the fact that private
sector has little ability to purchase during the recession. A concerned
question is whether the increased government spending crowds out
private consumption and whether it helps stimulate the economy. If
the government spending policy is effective; the private consumption
is expected to increase and can compensate the recent extra
government expense. In this study, the government spending is
categorized into government consumption spending and government
capital spending. The study firstly examines consumer consumption
along the line with the demand function in microeconomic theory.
Three categories of private consumption are used in the study. Those
are food consumption, non food consumption, and services
consumption. The dynamic Almost Ideal Demand System of the three
categories of the private consumption is estimated using the Vector
Error Correction Mechanism model. The estimated model indicates
the substituting effects (negative impacts) of the government
consumption spending on budget shares of private non food
consumption and of the government capital spending on budget share
of private food consumption, respectively. Nevertheless the result
does not necessarily indicate whether the negative effects of changes
in the budget shares of the non food and the food consumption means
fallen total private consumption. Microeconomic consumer demand
analysis clearly indicates changes in component structure of
aggregate expenditure in the economy as a result of the government
spending policy. The macroeconomic concept of aggregate demand
comprising consumption, investment, government spending (the
government consumption spending and the government capital
spending), export, and import are used to estimate for their
relationship using the Vector Error Correction Mechanism model.
The macroeconomic study found no effect of the government capital
spending on either the private consumption or the growth of GDP
while the government consumption spending has negative effect on
the growth of GDP. Therefore no crowding out effect of the
government spending is found on the private consumption but it is
ineffective and even inefficient expenditure as found reducing growth
of the GDP in the context of Thailand.", keywords = "government consumption spending, governmentcapital spending, private consumption on food, non food, andservices, Vector Error Correction Mechanism, Almost Ideal DemandSystem, substitution effect, complementary effect, consumer demand,aggregate demand", volume = "4", number = "6", pages = "1091-8", }