Fiscal Policy and Aggregate Consumption: New Evidence from the United States.

In this paper, the authors estimate the marginal rate of substitution between aggregate nondurable consumption and government expenditure using U.S. data from 1953 to 1993. This estimate is an important input to any attempt to assess the overall effectiveness of fiscal policy since it directly effects the size of the fiscal policy multiplier. Other recent studies have failed to establish a stable estimate of this parameter. The authors argue that this failure results from imposing the unrealistic assumption of parameter constancy. In contrast, they allow the marginal rate of substitution to depend on both the level and composition of government spending. Copyright 1996 by Scottish Economic Society.