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Government Expenditures and the Permanent-Income Model

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Author Info
Robert A. Amano (Bank of Canada)
Tony Wirjanto (Department of Economics, University of Waterloo)

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Abstract

There is substantial empirical literature which examines the relationship between private and public consumption. The conclusions from this literature, however, are generally mixed. In this paper, we attempt to provide some additional evidence on this relationship. We consider a two-good permanent-income model which allows us to estimate both the intraperiod and intertemporal elasticities of substitution. The estimation strategy proceeds in two steps. In the first step, we use cointegration methods to estimate the intraperiod preference parameter while in the second step, we estimate the intertemporal parameter via generalized method of moments. A useful implication of this approach is that it allows us to use the estimated preference parameters to shed some light on whether private and public consumption are best described as complements, substitutes or unrelated (in an Edgeworth-Pareto sense).

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Publisher Info
Paper provided by University of Waterloo, Department of Economics in its series Working Papers with number 98002.

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Date of creation: Nov 1997
Date of revision: Nov 1997
Handle: RePEc:wat:wpaper:98002

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  2. Ng, S. & Perron, P., 1994. "Unit Root Tests ARMA Models with Data Dependent Methods for the Selection of the Truncation Lag," Cahiers de recherche 9423, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    Other versions:
  3. han, H.L. & Ogaki, M., 1991. "Consumption, Income, and Cointegration Further Analysis," RCER Working Papers 305, University of Rochester - Center for Economic Research (RCER).
  4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  5. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
  6. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
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  7. Karras, Georgios, 1994. "Government Spending and Private Consumption: Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 9-22, February. [Downloadable!] (restricted)
  8. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
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  9. Graham, Fred C, 1993. "Fiscal Policy and Aggregate Demand: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 659-66, June. [Downloadable!] (restricted)
  10. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  11. Cooley, Thomas F & Ogaki, Masao, 1996. "A Time Series Analysis of Real Wages, Consumption, and Asset Returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(2), pages 119-34, March-Apr. [Downloadable!] (restricted)
  12. Cushing, Matthew J, 1992. "Liquidity Constraints and Aggregate Consumption Behavior," Economic Inquiry, Oxford University Press, vol. 30(1), pages 134-53, January.
  13. Ogaki, Masao & Park, Joon Y., 1997. "A cointegration approach to estimating preference parameters," Journal of Econometrics, Elsevier, vol. 82(1), pages 107-134. [Downloadable!] (restricted)
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  14. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December. [Downloadable!] (restricted)
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  15. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October. [Downloadable!] (restricted)
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  16. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation, Yale University, revised Apr 1989. [Downloadable!]
  17. West, Kenneth D, 1988. "Asymptotic Normality, When Regressors Have a Unit Root," Econometrica, Econometric Society, vol. 56(6), pages 1397-1417, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kögel, Tomas, 2009. "On the Relation between Dual-Rate Discounting and Substitutability," Economics Discussion Papers 2009-10, Kiel Institute for the World Economy. [Downloadable!]
  2. Kögel, Tomas, 2009. "On the Relation between Discounting of Climate Change and Edgeworth-Pareto Substitutability," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(27), pages 1-12. [Downloadable!]
  3. Christos Koulovatianos & Leonard J. Mirman, 2004. "Endogenous Public Policy and Long-Run Growth," University of Cyprus Working Papers in Economics 2-2004, University of Cyprus Department of Economics. [Downloadable!]
  4. Steven P. Cassou & Kevin J. Lansing, 2002. "Tax reform and public-sector expenditures," Working Papers in Applied Economic Theory and Econometrics 98-09, Federal Reserve Bank of San Francisco. [Downloadable!]
  5. Yum K. Kwan, 2006. "The Direct Substitution Between Government and Private Consumption in East Asia," NBER Working Papers 12431, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Teresa Lloyd-Braga & Leonor Modesto & Thomas Seegmuller, 2008. "Tax Rate Variability and Public Spending as Sources of Indeterminacy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00194395_v1, HAL. [Downloadable!]
    Other versions:
  7. Sharon Harrison & Jang-Ting Guo, 2006. "Useful Government Spending and Macroeconomic (In)stability under Balanced-Budget Rules," Working Papers 0701, Barnard College, Department of Economics. [Downloadable!]
    Other versions:
  8. Kühn, Stefan & Muysken, Joan & Veen, Tom van, 2009. "The Adverse Effects of Government Spending on Private Consumption in New Keynesian Models," Research Memoranda 004, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  9. Vicente Esteve & Juan Sanchis, . "Estimating the substitutability between private and public consumption: the case of Spain, 1960- 2001," Studies on the Spanish Economy 161, FEDEA. [Downloadable!]
    Other versions:
  10. Christos Koulovatianos & Leonard J. Mirman, 2005. "Endogenous Public Policy and Long-Run Growth: Some Simple Analytics," Vienna Economics Papers 0502, University of Vienna, Department of Economics. [Downloadable!]
  11. Tony S. Wirjanto, 2004. "Exploring consumption-based asset pricing model with stochastic-trend forcing processes," Applied Economics, Taylor and Francis Journals, vol. 36(14), pages 1591-1597, August. [Downloadable!] (restricted)
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