An Empirical Investigation into Government Spending and Private Sector Behaviour

Robert Amano and Tony Wirjanto (twirjant@uwaterloo.ca)

Staff Working Papers from Bank of Canada

Abstract: We examine whether there is a significant relationship between government and private consumption for Canada. We derive estimating equations between the two types of consumption under both cointegration and no-cointegration assumptions. This distinction seems to have been largely ignored in previous work in the literature. Our results suggest that this distinction is an important one. For government spending on goods and services, our pretests do not allow us to firmly conclude whether government and private consumption are cointegrated or not. Therefore, we estimate the relationship under both cointegration and no cointegration assumptions. Under the cointegration assumption we find the two types of consumption to be complements, whereas under the no- cointegration assumption we find them to be substitutes. For government investment spending we are unable to find any evidence consistent with cointegration. Under the maintained assumption of no cointegration we find no statistically significant relationship but an economic relationship that implies they are complements rather than substitutes. Dans la presente etude, les auteurs examinent s'il existe une relation significative entre les depenses de consommation publiques et privees au Canada. A cette fin, ils ont derive les equations a estimer sous les hypotheses de cointegration et d'absence de cointegration entre les deux types de consommation. En general, cette distinction ne semble pas avoir ete prise en compte dans les travaux effectues dans le domaine. Les resultats de l'etude donnent pourtant a penser que la distinction est importante. En ce qui a trait aux depenses en biens et services du secteur public, les tests preliminaires menes par les auteurs ne permettent pas de conclure avec certitude ni a la cointegration ni a la non- cointegration des depenses de consommation publiques et privees. C'est pourquoi les auteurs estiment la relation suivant chacune des deux hypotheses. Ils ont decouvert, dans le premier cas, que les deux types de consommation sont complementaires et, dans le deuxieme, qu'ils sont substituables. Pour ce qui est des depenses publiques d'investissement, les resultats obtenus n'ont pu etayer l'hypothese de cointegration. Sous l'hypothese d'absence de cointegration, ils n'ont constate aucune relation statistique significative, mais une relation economique qui indique que les depenses d'investissement et celles de consommation sont complementaires plutot que substituables.

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