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Consumption and Government Spending Substitutability Revisited: Evidence from Taiwan

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  • Tsung–wu Ho

Abstract

Bailey (1971) first documented the idea that there may be a degree of substitutability of the relationship between government spending and private consumption. In this paper, this issue is embedded in a Markov–switching framework where the relationship is subject to shifting between two different regimes. To control small–sample bias, the bootstrap maximum likelihood estimator is used. Evidence from Taiwan indicates that the crowding–in effect dominated the pre–1980 period; the substitutability dominates the post–1980 period. It renders unconvincing the Keynesian plea for expansionary fiscal policy of Taiwan since the 1980s. A Mundell–Fleming approach is proposed to explain this dating.

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  • Tsung–wu Ho, 2001. "Consumption and Government Spending Substitutability Revisited: Evidence from Taiwan," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(5), pages 589-604, November.
    • Handle: RePEc:bla:scotjp:v:48:y:2001:i:5:p:589-604
    DOI: 10.1111/1467-9485.00216
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