Are Consumption and Government Expenditures Substitutes or Complements? Morishima Elasticity Estimates from the Fourier Flexible Form

Abstract

This article provides estimates of Morishima elasticities of substitution between private consumption expenditures (nondurable goods, services, and the stock of durable goods) and government expenditures (federal defense expenditures, federal nondefense expenditures, and state and local expenditures), finding consistent evidence that private consumption and government expenditures are net Morishima substitutes. Elasticities of substitution vary over our sample period, estimated elasticities are generally asymmetric, and short‐run elasticity estimates differ from unity. In the long run, substitution elasticities remain asymmetric and vary over time. Our estimates are free of arbitrary functional form assumptions that can bias statistical inferences arising from our optimization model.