Government Expenditures and the Permanent-Income Model
There is substantial empirical literature which examines the relationship between private and public consumption. The conclusions from this literature, however, are generally mixed. In this paper, we attempt to provide some additional evidence on this relationship. We consider a two-good permanent-income model which allows us to estimate both the intraperiod and intertemporal elasticities of substitution. The estimation strategy proceeds in two steps. In the first step, we use cointegration methods to estimate the intraperiod preference parameter while in the second step, we estimate the intertemporal parameter via generalized method of moments. A useful implication of this approach is that it allows us to use the estimated preference parameters to shed some light on whether private and public consumption are best described as complements, substitutes or unrelated (in an Edgeworth-Pareto sense).
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|Date of revision:||Nov 1997|
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