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Substitution between private and government consumption in African economies

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  • Dawood, Taufiq Carnegie
  • Francois, John Nana

Abstract

In a context of elevated public debt and slower global growth, many countries in Africa are facing the prospect of sustained declines in public consumption. The macroeconomic impact of such adjustments will depend importantly on whether a decline in government consumption increases or decreases the marginal utility of private consumption. Employing a cointegration-panel approach, we estimate the intratemporal elasticity of substitution between private and government consumption in 24 African countries. Our estimates suggest that for plausible values of the relevant intertemporal elasticity, private and public consumption are Edgeworth substitutes in private utility. Countries facing fiscal consolidation can therefore expect some degree of demand-side offset to reductions in public consumption, and some resulting moderation in the impact of austerity on real GDP. In the presence of fungibility, our results also imply a labor-supply offset to declines in foreign aid for public investment. Country-level analysis suggests that these impacts of declines in public consumption may be heterogeneous across countries.

Suggested Citation

  • Dawood, Taufiq Carnegie & Francois, John Nana, 2018. "Substitution between private and government consumption in African economies," Economic Modelling, Elsevier, vol. 73(C), pages 129-139.
  • Handle: RePEc:eee:ecmode:v:73:y:2018:i:c:p:129-139
    DOI: 10.1016/j.econmod.2018.03.012
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    More about this item

    Keywords

    Africa; Fiscal policy; Fungibility; Government consumption; Elasticity of substitution; Panel cointegration;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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