Abstract
In this paper, we investigate the idea that a general model of consumption should allow for the direct effect of government consumption. We show, given an assumed preference specification, that there is a cointegration restriction implied by an intraperiod first‐order condition of the model. This restriction leads to a linear deterministic cointegrated system of government consumption, private consumption and their relative price that is consistent with the data for Taiwan. The intratemporal elasticity of substitution between government and private consumption is estimated to be about 1.1. Overall, we find consistent empirical evidence in support of our model.
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