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Liquidity Constraints and the Substitutability between Private and Government Consumption: The Role of Military and Non-military Spending

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  • Evans, Paul
  • Karras, Georgios

Abstract

Using data from sixty-six economies, the authors examine (1) the substitutability between private consumption and military and nonmilitary government spending and (2) the severity of liquidity constraints. Although the estimated substitutability parameters are fragile, private consumption and nonmilitary government spending are shown to be generally substitutes, whereas private consumption and military spending are better described as complements. The fraction of income that accrues to liquidity constrained households is typically positive and the severity of liquidity constraints, which is robust and precisely estimated, is shown to be negatively related to saving rates and positively related to the variability of transitory income. Copyright 1998 by Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 36 (1998)
Issue (Month): 2 (April)
Pages: 203-14

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Handle: RePEc:oup:ecinqu:v:36:y:1998:i:2:p:203-14

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Cited by:
  1. Pozzi, Lorenzo, 2006. "Ricardian equivalence under imperfect information," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2009-2026, November.
  2. L. Pozzi & F. Heylen & M. Dossche, 2002. "Government debt and the excess sensitivity of private consumption to current income: an empirical analysis for OECD countries," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 02/155, Ghent University, Faculty of Economics and Business Administration.
  3. Gisle James Natvik, 2009. "Government Spending and the Taylor Principle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 57-77, 02.
  4. Griet Malengier & Lorenzo Pozzi, 2005. "Examining Ricardian Equivalence by estimating and bootstrapping a nonlinear dynamic panel model," Money Macro and Finance (MMF) Research Group Conference 2005 61, Money Macro and Finance Research Group.
  5. Woon Gyu Choi & Michael B. Devereux, 2005. "Asymmetric Effects of Government Spending," IMF Working Papers 05/7, International Monetary Fund.

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