Intertemporal substitution in public and private consumption - long-run evidence from the US and the UK

This paper explores the question whether public and private consumption fluctuations in the US and the UK are interrelated. Based on annual historical data we find that government consumption is a normal substitute for private consumption. The share of public consumption in the individual consumption bundle ranges from 5 to 10% for the full sample periods (including wartime years). However, unrestricted estimation yields negative rates of time preference and restricted estimation leads to a rejection of the intertemporal substitution model of consumption. In addition, the applicability of the model of intertemporal substitution with respect to government consumption behaviour is tested: governments have a significantly higher intertemporal substitution elasticity than the individual consumer. (C) 1999 Elsevier Science B.V. All rights reserved.