Consumption effects of government purchases

This paper takes a microeconomic- and aggregation-theoretic approach to the empirical analysis of the relationship between private and government consumption. It provides estimates of the Morishima elasticities of substitution based on an empirical comparison and evaluation of the effectiveness of a number of well-known flexible functional forms - the locally flexible generalized Leontief (see Diewert (1971)), translog (see Christensen et al. (1975)), and Almost Ideal Demand System (AIDS) (see Deaton and Muellbauer (1980)), and the semi-nonparametric globally flexible Fourier (see Gallant (1981)) and Asymptotically Ideal Model (AIM) (see Barnett et al. (1991)). In doing so, we pay explicit attention to the theoretical regularity conditions of positivity, monotonicity, and curvature, using recent advances in microeconometrics. Our results indicate that substitutability describes the relationship between government and private consumption, and hence concur with the consensus opinion that government purchases are substitutes for private consumption.