Intratemporal Substitution and Government Spending
- 1 November 1997
- journal article
- Published by MIT Press in The Review of Economics and Statistics
- Vol. 79 (4), 605-609
- https://doi.org/10.1162/003465397557187
Abstract
In this paper, we examine the idea that a general model of consumption should allow for the direct effect of government expenditures in a two-good permanent-income model. We show, given an assumed preference specification, that there is a cointegration restriction implied by an intraperiod first-order condition of the model. This restriction leads to a linear deterministic cointegration relation between government spending, private consumption, and their relative price that is supported by the data. Using this restriction to recover the preference parameters, we estimate the intraperiod elasticity of substitution for both government and private consumption to be about 0.9. Overall, we find consistent empirical evidence in support of our model. © 1997 by the President and Fellows of Harvard College and the Massachusetts Institute of TechnologyKeywords
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