In this Paper, we investigate the relation between public and private consumption, by constructing a general government spending dataset, by function, for twelve European Union countries. In particular, we split government consumption into two categories. The first category includes defence, public order, and justice ('public goods'). The second category includes health, education, and other services that could have been provided privately ('merit goods'). Equations from a relatively general theoretical model of household behaviour are estimated by GMM. The estimates are fairly robust in showing that public goods substitute, while merit goods complement, private consumption, and that the relation between merit goods and private goods is stronger than that between public goods and private goods. So that, in the aggregate, government and private consumption are complements. It also suggests that the potential calibration/estimation bias by ignoring the composition of government consumption might be substantial.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
3617.
Find related papers by JEL classification: C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
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King, Robert G. & Rebelo, Sergio T., 1999.
"Resuscitating real business cycles,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007
Elsevier.
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