The Direct Substitution Between Government and Private Consumption in East Asia

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We investigate empirically the extent to which government consumption substitutes for private consumption in nine East Asia countries. Panel cointegrating regression uncovers a significantly positive elasticity of substitution between government and private consumption, implying on average government and private consumption are substitutes in East Asia. Country-by-country analysis, however, reveals diversity in the substitutability estimates. The four North East countries – China, Hong Kong, Japan, and Korea – tend to share similar and moderate values of the substitution elasticity. For the five ASEAN countries studied in this paper, the relationship between private and government consumption vary substantially, both in the sign and magnitude of the elasticity of substitution. Private and government consumption in Malaysia and Thailand are strong substitutes, but they are found to be complements in Indonesia and Singapore. In between is the Philippines which has a near zero elasticity of substitution.

Published: Ito, Takatoshi and Andrew K. Rose (eds.) Fiscal Policy and Management in East Asia, NBER-East Asia Seminar on Economics series, vol 16. Chicago and London: University of Chicago Press, 2007.

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