Government Expenditure and Household Consumption in Bangladesh through the Lens of Economic Theories: An Empirical Assessment

The relationship between government and household consumption remains to be one of the contentious issues in both theories and empirics, though its’ immense importance in fiscal policy formulation. Like theories, the empirical studies regarding the relationship between government and household consumption provide opposing results. In this backdrop, the present study examines public-private consumption relationship for Bangladesh economy through the lens of economic theories using the cointegration and error correction modeling strategies to tackle the problem of non-stationary data. Two different variant of cointegration technique have been employed and in either case a valid long run positive relationship has been found. However, the error correction model has found an inverse relationship between public and private consumption in the short run. Finally, we test for Granger causality and find no long run causal relationship between government consumption and household consumption. In general, our finding goes with the Barro-Ricardian equivalence hypothesis of government spending that household consumption is unrelated with government consumption decision in the long-run.