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The Optimal Public Expenditure Financing Policy: Does The Level Of Economic Development Matter?

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Author Info
NILOY BOSE
JILL A. HOLMAN
KYRIAKOS C. NEANIDIS

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Abstract

"This paper explores how the optimal mode of public finance depends on the level of economic development. The theoretical analysis suggests that in the presence of capital market imperfection and liquidity shocks, the detrimental effect of inflation on growth is stronger (weaker) at lower (higher) levels of economic development. Consequently, income taxation (seigniorage) is a relatively less distortionary way of financing public expenditure for low-income (high-income) countries. We provide empirical support for our model's predictions using a panel of 21 Organization for Economic Cooperation and Development countries and 40 developing countries observed over the period 1972-1999." ("JEL" E44, E6, H6, O42) Copyright 2007 Western Economic Association International.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1465-7295.2007.00021.x
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Publisher Info
Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 45 (2007)
Issue (Month): 3 (07)
Pages: 433-452
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Handle: RePEc:bla:ecinqu:v:45:y:2007:i:3:p:433-452

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Chamley, Christophe, 1991. "Taxation of Financial Assets in Developing Countries," World Bank Economic Review, Oxford University Press, vol. 5(3), pages 513-33, September.
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  5. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November. [Downloadable!] (restricted)
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  8. Mark Gertler & Kenneth Rogoff, 1989. "Developing country borrowing and domestic wealth," Proceedings, Federal Reserve Bank of San Francisco.
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  9. Espinosa-Vega, Marco A & Yip, Chong K, 1999. "Fiscal and Monetary Policy Interactions in an Endogenous Growth Model with Financial Intermediaries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 595-615, August.
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  10. Brechling, Frank, 1973. "Wage Inflation and the Structure of Regional Unemployment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 355-79, Part II F. [Downloadable!] (restricted)
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  13. Chamley, Christophe, 1991. "Taxation of financial assets in developing countries," Policy Research Working Paper Series 651, The World Bank. [Downloadable!]
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  17. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June. [Downloadable!] (restricted)
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  19. Marco A. Espinosa-Vega & Chong K. Yip, 2000. "Government financing in an endogenous growth model with financial market restrictions," Working Paper 2000-17, Federal Reserve Bank of Atlanta. [Downloadable!]
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  20. Robert G. King & Sergio Rebelo, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," NBER Working Papers 3338, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)
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  22. Mark Bils & Peter J. Klenow, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December. [Downloadable!] (restricted)
  23. Drewes, Torben, 1987. "Regional Wage Spillover in Canada," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 224-31, May. [Downloadable!] (restricted)
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  25. Mendoza, Enrique G. & Milesi-Ferretti, Gian Maria & Asea, Patrick, 1997. "On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture," Journal of Public Economics, Elsevier, vol. 66(1), pages 99-126, October. [Downloadable!] (restricted)
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  26. Michael Bleaney & Norman Gemmell & Richard Kneller, 2001. "Testing the endogenous growth model: public expenditure, taxation, and growth over the long run," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 36-57, February. [Downloadable!] (restricted)
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  28. Honohan, Patrick, 1996. "Does It Matter How Seigniorage Is Measured," Applied Financial Economics, Taylor and Francis Journals, vol. 6(3), pages 293-300, June. [Downloadable!] (restricted)
  29. Pecorino, Paul, 1997. "The Optimal Rate of Inflation When Capital is Taxed," Journal of Macroeconomics, Elsevier, vol. 19(4), pages 657-673, October. [Downloadable!] (restricted)
  30. Miller, Stephen M & Russek, Frank S, 1997. "Fiscal Structures and Economic Growth: International Evidence," Economic Inquiry, Oxford University Press, vol. 35(3), pages 603-13, July.
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  31. De Gregorio, Jose, 1993. "Inflation, taxation, and long-run growth," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 271-298, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michele Berardi, 2008. "Fundamentalists vs. chartists: learning and predictor choice dynamics," Centre for Growth and Business Cycle Research Discussion Paper Series 104, Economics, The Univeristy of Manchester. [Downloadable!]
  2. Keith Blackburn & Kyriakos C. Neanidis & M. Emranul Haque, 2008. "Corruption, Seigniorage and Growth: Theory and Evidence," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Keith Blackburn & Kyriakos C. Neanidis & M. Emranul Haque, 2008. "Comparing Seasonal Forecasts of Industrial Production," Centre for Growth and Business Cycle Research Discussion Paper Series 103, Economics, The Univeristy of Manchester. [Downloadable!]
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