["Journal of Money, Credit and Banking, EarlyView. ", "\nAbstract\nThis paper assumes a generalized Constant Elasticity of Substitution (CES) utility function, which allows for nonhomothetic preferences, to study the relationship between public and private consumption. This captures that the optimal ratio of government and private consumption may also depend on income and not exclusively on relative prices, hence correcting for a potential bias when estimating the degree of substitutability. We demonstrate the importance of nonhomotheticity using a cointegration‐panel approach and data from 16 Latin American and Caribbean countries from 1980 to 2014. Our results suggest that private and public consumption are gross complements. Fiscal policy implications are discussed."]