Estimating the substitutability between private and public consumptionthe case of Spain, 1960-2001

Abstract

This paper examines the relationship between private and public consumption using Spanish data over the period 1960-2001. We extend the previous analysis addressing the question of whether this relationship is stable over time, or exhibit a structural break allowing the instability to occur at an unknown date. Our empirical results are consistent with the existence of a long-run relationship between private and public consumption. Thus, we have been detected the structural changes or regime shifts in the cointegration regression around the time of the oil price shock of 1973/74. In addition, the estimates both the intratemporal and intertemporal elasticities of substitution between the two types of expenditure (in full-sample and in both sub-samples) suggests that private and public consumption in Spanish economy are Edgeworth-Pareto substitutes.