AN EMPIRICAL-ANALYSIS ON THE SUBSTITUTABILITY BETWEEN PRIVATE CONSUMPTION AND GOVERNMENT PURCHASES

This paper estimates substitutability of government purchases for priv ate consumption using an optimal consumption model. The utility functi on features several types of nonseparabilities. The paper finds that G MM estimates are affected by the specification of nonseparability betw een private consumption and government purchases, by the restriction o f time-separability, and by the measurement of real interest rates.