Private and public consumption: substitutes or complements?[Temporary and permanent government spending in an open economy]

This article investigates the degree to which government consumption expenditures substitute or complement private consumption, one of the most important (and most overlooked) determinants of the fiscal multiplier. Using panel datasets from a large number of heterogeneous economies over 1970–2016, we find that private and government consumption are best described as complementary both in the aggregate and for nine different categories of government spending we consider. The degree of complementarity, however, differs substantially across government spending categories, being the highest for education, recreation, and housing in the Organisation for Economic Co-Operation and Development (OECD); and for Public Order and Recreation in the non-OECD. Our estimates imply that fiscal multiplier values in those spending categories are substantially higher than in categories that are less (or not at all) complementary with private consumption.