Investigating the Impact of Government Size on the Substitutability between Government Spending and Private Consumption in Selected OIC Countries

The effect of government spending on private consumption، as the largest and the most stable component of aggregate demand always has been preoccupying many economists. In this article، using the elasticity of substitution concept، we investigate the substitutability of government spending for private consumption in 48 OIC countries. We use the Pesaran’s CD test for investigating the cross-section dependency in the data. Then the stationary of variables confirmed by IPS and CIPS tests and the regression equations estimate by CUP-FM estimator. According to the estimation results، the substitutability between government spending and household consumption was confirmed for OIC countries. In addition، the results of estimating tell that in case of countries with larger governments the degree of substitutability between government spending and private consumption is greater.