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The Direct Substitution Between Government and Private Consumption in East Asia

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  • Yum K. Kwan

Abstract

We investigate empirically the extent to which government consumption substitutes for private consumption in nine East Asia countries. Panel cointegrating regression uncovers a significantly positive elasticity of substitution between government and private consumption, implying on average government and private consumption are substitutes in East Asia. Country-by-country analysis, however, reveals diversity in the substitutability estimates. The four North East countries - China, Hong Kong, Japan, and Korea - tend to share similar and moderate values of the substitution elasticity. For the five ASEAN countries studied in this paper, the relationship between private and government consumption vary substantially, both in the sign and magnitude of the elasticity of substitution. Private and government consumption in Malaysia and Thailand are strong substitutes, but they are found to be complements in Indonesia and Singapore. In between is the Philippines which has a near zero elasticity of substitution.

Suggested Citation

  • Yum K. Kwan, 2006. "The Direct Substitution Between Government and Private Consumption in East Asia," NBER Working Papers 12431, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12431
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    Cited by:

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    2. Imadeddin Ahmed Almosabbeh, 2020. "Is the Relationship Between Government Spending and Private Consumption in Egypt Symmetric?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(3), pages 285-308, August.
    3. Bandyopadhyay, Sanghamitra & Esteban, Joan, 2007. "Redistributive taxation and public expenditures," LSE Research Online Documents on Economics 6537, London School of Economics and Political Science, LSE Library.
    4. Kuehn, S. & van Veen, A.P. & Muysken, J., 2009. "The adverse effects of government spending on private consumption in new Keynesian models," Research Memorandum 004, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    5. Eduardo de Sá Fortes Leitão Rodrigues, 2021. "Uncertainty and Effectiveness of Public Consumption," Working Papers REM 2021/0180, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    6. Janusz Jabłonowski, 2022. "Crowding Out of Informal Economy Labour Supply by Unconditional Child Benefits," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1, pages 31-43.
    7. Chukiat Chaiboonsri & Prasert Chaitip & N. Rangaswamy, 2008. "A Panel Unit Root and Panel Cointegration Test of the Modeling International Tourism Demand in India," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 8(1), pages 95-124.
    8. Prasert Chaitip & Chukiat Chaiboonsri, 2009. "A Panel Cointegration Analysis: Thailand’s International Tourism Demand Model," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 9(1), pages 129-142.
    9. Stefan Kühn & Joan Muysken & Tom Van Veen, 2010. "The Adverse Effect Of Government Spending On Private Consumption In New Keynesian Models," Metroeconomica, Wiley Blackwell, vol. 61(4), pages 621-639, November.
    10. Chukiat Chaiboonsri & Jittaporn Sriboonjit & Thanes Sriwichailamphan & Prasert Chaitip & Songsak Sriboonchitta, 2010. "A Panel Cointegration Analysis: An Application To International Tourism Demand Of Thailand," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 10(3), pages 69-86.
    11. Auteri, Monica & Costantini, Mauro, 2010. "A panel cointegration approach to estimating substitution elasticities in consumption," Economic Modelling, Elsevier, vol. 27(3), pages 782-787, May.
    12. Shvets, Serhii, 2020. "The golden rule of public finance under active monetary stance: endogenous setting for a developing economy," MPRA Paper 101232, University Library of Munich, Germany.
    13. Khalid Khan & Chen FEI & Muhammad Abdul Kamal & Badar Nadeem Ashraf, 2015. "Impact of Government Spending on Private Consumption Using ARDL Approach," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(2), pages 239-248, February.
    14. Behnam Nikbin & Saman Panahi, 2016. "Estimation of Private Consumption Function of Iran: Autoregressive Distributed Lag Approach to Co-integration," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 653-659.

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    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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