Abstract
This study examines the impact of government spending on household consumption for the Economic Community of West African States (ECOWAS). As a modelling strategy, we use the Common Correlated Effect Mean Group (CCEMG) estimator that accounts for both parameter heterogeneity and cross-sectional dependence. The study provides various pieces of evidence through whole-panel and country-level analyses. The panel estimates indicate that government consumption has, on average, a negative effect on private consumption, implying that government and private consumption are substitutes. Country-level results reveal, however, considerable heterogeneity in the degree of substitutability across countries. They show crowding out effects in six countries, crowding in effects in one country and no significant effect in five countries. Therefore, government consumption is not a good instrument to stimulate aggregate demand and economic growth in ECOWAS countries.
Highlights
The impact of government spending on private consumption and economic growth is one of the controversial issues in both theory and empirics
This study examines the impact of government spending on household consumption for the Economic Community of West African States (ECOWAS)
To make sure that this result is not driven by a few countries, we look at the country-level Common Correlated Effect Mean Group (CCEMG) estimates
Summary
The impact of government spending on private consumption and economic growth is one of the controversial issues in both theory and empirics. A number of studies introduced specific modifications in standard real business cycle model to generate crowding in effect [4] [5]. Full ricardian equivalence argues that an increase in government spending, regardless the way of financing, has no impact on household consumption This holds because households have perfect foresight and knowledge about the economy. This study tries to contribute to the empirical literature by investigating the impact of government spending on private consumption for the member countries of the Economic Community of West African States (ECOWAS). From the methodological perspective, this study uses a more efficient and less restrictive econometric approach which improves the findings on the subject for ECOWAS countries but for overall empirical literature on the nexus between government and private consumption.
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