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Intratemporal elasticity of substitution between private and public consumption: new evidence and implications

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  • John Nana Francois

    (Fiscal Policy and Sustainable Growth Unit, World Bank)

  • Andrew Keinsley

    (Weber State University)

Abstract

This paper estimates the intratemporal elasticity of substitution (IES) between private and public consumption in private utility. Using panel data for 17 European countries over 1970-2018, we estimate the IES to lie between 0.6 and 0.74. When combined with the relevant intertemporal elasticity of substitution, our estimated IES implies that private and public consumption are Edgeworth complements. The panel estimate, however, conceals a large heterogeneity where the IES ranges from as low as 0.3 in Italy to 1.3 in Ireland. This suggests that the crowding-in (out) effect of fiscal policies involving change in government consumption will differ across countries. This cross-country variation in the IES is positively correlated the share of health spending in public expenditure but negatively correlated with the share of public order and safety in government expenditures. We also find a U-shape relationship between the size of IES and government size.

Suggested Citation

  • John Nana Francois & Andrew Keinsley, 2023. "Intratemporal elasticity of substitution between private and public consumption: new evidence and implications," Empirical Economics, Springer, vol. 65(4), pages 1655-1692, October.
    • Handle: RePEc:spr:empeco:v:65:y:2023:i:4:d:10.1007_s00181-023-02387-w
    DOI: 10.1007/s00181-023-02387-w
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    More about this item

    Keywords

    Intratemporal elasticity of substitution; Heterogeneity; Edgeworth complementarity; Public and private consumption; Fiscal policy;
    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; Modern Monetary Theory
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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