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 flu ctuations in the US and the UK are interrelated. Based on annual historical data we find that government consumption is a normal substitute for privat e consumption. The share of public consumption in the individual consumptio n bundle ranges from 5 to 10% for the full sample periods (including wartim e years). However, unrestricted estimation yields negative rates of time pr eference and restricted estimation leads to a rejection of the intertempora l 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 Sci ence B.V. All rights reserved.