LIQUIDITY CONSTRAINTS AND THE SUBSTITUTABILITY BETWEEN PRIVATE AND GOVERNMENT CONSUMPTION: THE ROLE OF MILITARY AND NON‐MILITARY SPENDING

Paul Evans · Georgios Karras

33 citations0/0 files storedEconomic Inquiry

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Monetary Policy and Economic Impact Economic and Fiscal Studies Fiscal Policy and Economic Growth

Abstract

Using data from 66 economies, we examine (i) the substitutability between private consumption and military and non‐military government spending, and (ii) the severity of liquidity constraints. Although the estimated substitutability parameters are fragile, private consumption and non‐military government spending are shown to be generally substitutes, whereas private consumption and military spending are better described as complements. The fraction of income that accrues to liquidity constrained households is typically positive, and the severity of liquidity constraints (which is robust and precisely estimated) is shown to be negatively related to saving rates, and positively related to the variability of transitory income. (JEL E62, E21)

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References

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