Private and Public Consumption Expenditure Substitutability: Bayesian Estimates for the G7 Countries

The degree of substitution between private and public per capita consumption for the G7 countries is estimated over the period 1960 to 1996. Special attention is given to isolating both long-run and short-run substitution effects. Inferences are produced using a Bayesian methodology, with a Jeffreys prior being used to offset an identification problem in the likelihood function. The marginal posterior densities of interest are estimated via a hybrid of Markov chain Monte Carlo algorithms. The empirical results indicate that for the US, Germany, France and Italy, private and public consumption expenditure are substitutes in the short-run, but complements in the long-run. The opposite result occurs for the UK, whilst Japan and Canada exhibit no significant short-run or long-run relationships.