Public and Private Consumption in Bangladesh: An Empirical Assessment

The relationship between government and household consumption is one of the contentious issues in both theory and empirics although this has significant implications in fiscal policy. The empirical studies on the relationship between government and household consumption provide contrasting results. The present study examines public-private consumption relationship in the Bangladesh economy using the cointegration and error correction modeling approaches to tackle the problem of non-stationary data. Two different variants of cointegration technique have been employed and in both cases a valid long run positive relationship is found. However, the error correction model finds an inverse relationship between the two in the short run. In general, the findings go with the Barro-Ricardian equivalence hypothesis of government spending that household consumption is unrelated to government consumption decision in the long-run.