In an endogenous growth model with two public services with differing productivities, this paper analytically characterises optimal fiscal policy for a decentralised economy, whereby the optimal values of the growth rate, tax rate and expenditure shares on the two public goods are linked directly to their productivity parameters. Using panel data for 15 developing countries over 28 years, we show using GMM techniques, that current (capital) spending has positive (negative) and significant effects on the growth rate, contrary to commonly held views. Our theoretical results extend, and our empirical results modify those obtained by Devarajan et al. (1996).
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Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number
06-19.
Length: 28 pages Date of creation: Jun 2006 Date of revision: Handle: RePEc:bru:bruedp:06-19
Contact details of provider: Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK
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