Substitution Between Private and Public Consumption in Australia

Abstract

Large increases in the private sector's savings ratio during a period of rapid growth in the relative size of the public sector has led to the suggestion that substitution between private and public consumption may be an important fcature of the Australian economy (Clements 1979). In this paper, empirical estimates are presented which indicate that no such substitution exists The estimates are derived from a theoretical model of consumption which is based on inter‐temporal optimization in a stochastic environment. The estimates also suggest that private sector consumption behaviour is consistent with the joint hypothesis of rational expectations and Ricardian equivalence Copyright © 1989, Wi..