Keywords: Demand system; Conditional specification; Government expenditure; Separability.
We provide theoretical and empirical evidence that private demand depends on government expenditure and therefore estimates based on standard separable private models are not completely consistent. The micro-based approach is specified in order to derive an exact test for non-separability between the private categories of expenditure and public consumption. Estimates of a differential demand system using a panel of eight European Union countries are provided. The results show some evidence of different effects of substitutability and complementarity within the components of private expenditure as well as within countries. This evidence is coherent with the recent empirical macroeconomic results found in the literature and shows interesting policy implications in assessing the changes in public provision effects.