Chapter

The Direct Substitution between Government and Private Consumption in East Asia

Yum K. Kwan

in Fiscal Policy and Management in East Asia

Published by University of Chicago Press

Published in print November 2007 | ISBN: 9780226386812
Published online February 2013 | e-ISBN: 9780226387062 | DOI: http://dx.doi.org/10.7208/chicago/9780226387062.003.0003
The Direct Substitution between Government and Private Consumption in East Asia

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An important issue in the design of fiscal policy is the substitutability between government and private consumption. If the private sector derives utility from government-provided goods and services, and regards private and government consumption as close substitutes, an increase in government consumption will be offset by a corresponding decrease in private consumption, rendering the size of the fiscal multiplier relatively small and even potentially negative. On the other hand, if private and government consumption are complementry, an expansionary fiscal policy will be relatively effective in stimulating aggregate demand as private consumption will reinforce the initial fiscal impulse. This chapter explores the substitutability issue for nine East Asian countries—China, Hong Kong, Japan, Korea, Indonesia, Malaysia, Philippines, Singapore, and Thailand—and offers a structural interpretation to the cointegrating regression model by deriving it as an equilibrium condition. It then provides a brief description of government expenditures in East Asia.

Keywords: fiscal policy; East Asia; government consumption; private consumption; government expenditures; Philippines; China; Japan; Thailand; Korea

Chapter.  6510 words.  Illustrated.

Subjects: Business and Management

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