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Government Expenditures and the Permanent-Income Model

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  • Robert A. Amano

    (Bank of Canada)

  • Tony Wirjanto

    (Department of Economics, University of Waterloo)

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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Bibliographic 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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  1. Cushing, Matthew J, 1992. "Liquidity Constraints and Aggregate Consumption Behavior," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 30(1), pages 134-53, January.
  2. John Y. Campbell & N. Gregory Mankiw, 1991. "Permanent Income, Current Income, and Consumption," NBER Working Papers 2436, National Bureau of Economic Research, Inc.
  3. Graham, Fred C, 1993. "Fiscal Policy and Aggregate Demand: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 659-66, June.
  4. West, Kenneth D, 1988. "Asymptotic Normality, When Regressors Have a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1397-1417, November.
  5. Ogaki, M & Reinhart, C-M, 1995. "Measuring Intertemporal Substitution : The Role of Durable Goods," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 404, University of Rochester - Center for Economic Research (RCER).
  6. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, Econometric Society, vol. 61(4), pages 783-820, July.
  7. Barro, Robert J., 1981. "Output Effects of Government Purchases," Scholarly Articles 3451294, Harvard University Department of Economics.
  8. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  9. han, H.L. & Ogaki, M., 1991. "Consumption, Income, and Cointegration Further Analysis," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 305, University of Rochester - Center for Economic Research (RCER).
  10. Karras, Georgios, 1994. "Government Spending and Private Consumption: Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 26(1), pages 9-22, February.
  11. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 869R, Cowles Foundation for Research in Economics, Yale University, revised Apr 1989.
  12. Ng, S. & Perron, P., 1994. "Unit Root Tests ARMA Models with Data Dependent Methods for the Selection of the Truncation Lag," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9423, Universite de Montreal, Departement de sciences economiques.
  13. Ogaki, Masao & Park, Joon Y., 1997. "A cointegration approach to estimating preference parameters," Journal of Econometrics, Elsevier, Elsevier, vol. 82(1), pages 107-134.
  14. 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, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
  15. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 813-36, July.
  16. 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., John Wiley & Sons, Ltd., vol. 11(2), pages 119-34, March-Apr.
  17. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
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