Authors: Paitoon Kraipornsak
This study investigates both the short run and medium run effects of government consumption expenditure and government investment on the macro economy. Two models are used in the short run: the first treats all variables as endogenous and the second government investment and export being exogenous to the system. Three conceptual relations are used in the medium run: Phillips Curve, Okun’s Law, and aggregate demand relation. In the short run, government consumption expenditure significantly influences output while government investment effect is insignificant. Private investment and government consumption expenditure can positively determine private consumption. In the medium run, government investment negatively impacts on private consumption. While private investment and government consumption do not affect private consumption, government investment can reduce private consumption significantly. The relationship between output, inflation and unemployment is found significant, consistent with the theory. Government consumption negatively relates to growth of output. Government investment can positively affect output growth however it is insignificant. It implies that government expenditure or demand stimulus strategy cannot have any significant impact on output in the medium run.
Keywords: Short Run Effect, Medium Run Effect, Government Investment, Government Consumption Expenditure, Macro economy, Vector Error Correction, Phillips Curve, Okun’s Law, aggregate demand relation