Government Debt, Government Spending, and Private Sector Behavior: Comment/Comment/Reply

Kormendi (1983) developed a consolidated approach to modeling private sector consumption-saving behavior based on rational evaluation of the consequences of government fiscal policy. An analysis of the sensitivity of his results to alternative time periods of estimation, to the differentiation between federal debt and state and local debt, and to the measurement of government debt raises questions about the robustness of his findings. Modigliani and Sterling provide evidence that, once Kormendi's measurement errors and misspecifications are corrected, the data for the US in the postwar period are strikingly consistent with the Life Horizon-Life Cycle Hypothesis approach to consumption behavior and inconsistent with the infinite-horizon-Ricardian Equivalence Proposition formulation. Finally, Kormendi and Meguire demonstrate that Kormendi's benchmark consolidated specification estimated over the 1931-1983 period is not rejected when pitted against Barth, Iden, and Russek's combinations of explanatory variables and sample periods with a clear a priori motivation.