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.
|Number of pages||13|
|Journal||Japanese Economic Review|
|Publication status||Published - 2004 Jun|
ASJC Scopus subject areas
- Economics and Econometrics