Cointegration, Government Spending and Private Consumption: Evidence from Japan

Tsung‐Wu Ho

The Japanese Economic Review, 2004, vol. 55, issue 2, 162-174

Abstract: Assuming a CRRA preference, this paper shows that there is a cointegration restriction implied by the intra‐temporal first‐order condition in the consumption function. This restriction predicts a cointegrated system of government consumption, private consumption, and their relative price. Our analysis indicates that, first, Johansen's VECM confirms the theoretical prediction that is supported by the data of Japan; moreover, Bierens’ (1997) nonparametric estimator severely contradicts with the theoretical model and fits the data poorly; second, Japanese people have increasing willingness to rearrange their consumption over time. Besides, the intratemporal relationship between private and government consumption remains relatively stable over time.

Date: 2004
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