Abstract
This paper uses the life-cycle approach to derive an equilibrium intratemporal efficiency condition which relates the marginal utility of consumption of nondurable goods and services to the marginal utility of consumption of services from durable goods. Given this condition and the assumption that marginal utilities are affected by the level of public spending, a long-run relationship between components of private consumption and public expenditure is then postulated. The application of cointegration analysis to UK data supports the existence and uniqueness of such a long-run relationship, and estimates based on the error correction approach produce results which suggest that (i) a change in public spending has different effects on components of private consumption in the short-run, and (ii) the entire burden of long-run substitution falls on nondurable consumption.
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I would like to thank Hendrik P. van Dalen, Kenneth D. West, and two anonymous referees for helpful comments on earlier versions of this paper. The usual disclaimer applies.
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Molana, H. Consumption and fiscal policy. Empirical Economics 22, 63–81 (1997). https://doi.org/10.1007/BF01188170
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DOI: https://doi.org/10.1007/BF01188170