Does the public sector obey the rational expectations—permanent income hypothesis? A multi–country study of the time series properties of government expenditures

Speight, A. E.H. and MacDonald, R. (1989) Does the public sector obey the rational expectations—permanent income hypothesis? A multi–country study of the time series properties of government expenditures. Applied Economics, 21(9), pp. 1257-1266. (doi: 10.1080/758520665)

Abstract

Whilst considerable attention has been devoted to private-sector consumption determination, public-sector expenditure determination has received relatively scant regard. In contrast, the magnitude and financing of public-sector expenditures has figured centrally in .debates conceining the impact of public-sector economic activity on macroeconomic ,variables and private-sector behaviour. For example, Plosser (1982), Dwyer (1982), Evans . (1985,19871, Seater (1985) and McMillin (1987) have examined the impact of government budget deficits on interest rates and inflation, whilst Feldstein (1982), Kormendi (1983), Aschauer (1985), Seater and Mariano (1985) and Bean (1986) have developed frameworks which incorporate effects of government expenditures and deficits on private-sector :consumption through substitution and the impingement of costs of government activity via present .and future taxation. Such approaches generally presume government expenditures to .be exogenously given to the private sector or to obey 'some notion of public-sector pernianent 'income'. Disappointingly, however, these studies do not attempt to explicitly test 'any behavioural niodel of government expenditures. Given the important economic impact 6f government behaviour, it is undesirable to treat state expenditures as exogenously determined, and potentially misleading to simply assume some particular model of endogenous expenditure determination to be appropriate without . . . qualification. As indicated above, the rational expectations-permanent income hypothesis (REPIH) is often'mooted as a possible model of public-sector expenditure determination.,' In this paper we empirically investigate the REPIH model using government expenditure from four OECD countries: namely, Canada, West Germany, the UK and the USA. The remainder of the paper is organized as follows. In Section I1 Some theoretical considerations are noted in attempting to extend the REPIH to encompass government behaviour, Section 111 reports the empirical findings and Section IV offers some concluding remarks.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: MacDonald, Professor Ronald
• Authors: Speight, A. E.H., and MacDonald, R.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Applied Economics
• Publisher: Taylor and Francis
• ISSN: 0003-6846
• ISSN (Online): 1466-4283