FISCAL-POLICY AND AGGREGATE CONSUMPTION - NEW EVIDENCE FROM THE UNITED-STATES

In this paper we estimate the marginal rate of substitution between ag gregate per-capita consumption and per-capita government expenditure o n goods and services using US quarterly data over the period 1953 to 1 993. This estimate is an important input to any attempt to assess the overall effectiveness of fiscal policy since it directly affects the s ize of the fiscal policy multiplier. Other recent consumption studies which incorporate the effects of government expenditure have failed to establish a stable estimate of the marginal rate of substitution. We argue that this failure results from imposing the unrealistic assumpti on that this parameter is constant. In contrast, we allow the marginal rate of substitution to depend on both the level and composition of g overnment spending.