Liquidity Constraints and the Substitutability between Private and Government Consumption: The Role of Military and Non-military Spending
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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Volume (Year): 36 (1998)
Issue (Month): 2 (April)
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