Useful government spending, direct crowding-out and fiscal policy interdependence

This paper introduces non-separability between private and public consumption in a dynamic, open economy with imperfect competition and nominal rigidities. This implies a direct crowding-out effect that, generalizing well known closed economy results, tends to reduce consumption following both domestic and foreign fiscal expansions. A less expected result is that substitutability has a positive effect on the short-run output spillover. (C) 2003 Elsevier Science Ltd. All rights reserved.