Revisiting Aschauer via ICM estimation

In this article, the effect of public expenditure on consumers’ welfare is considered by estimating the substitutability of public expenditure for private consumption in the context of Aschauer (1985). Aschauer’s full information maximum likelihood estimation requires much more assumptions than the equilibrium condition of his model. Therefore, this study proposes an alternative estimation approach under a weaker condition, which is equivalent to the equilibrium condition of the model. In particular, I propose to use an integrated conditional moments estimation and apply the proposed estimation to US economy. The estimation results show that Aschauer’s model specification is not rejected at conventional significance levels, even though substitutability of public expenditure for private consumption is not significantly different from zero.