Public Expenditure Composition and Economic Growth: Optimal Adjustment by Using Gradient Method
AbstractPrevious researches studied how the components of fiscal spending affect the economic growth but did not explicitly enquire into how to adjust the components in order to achieve the highest rate of economic growth starting from the present shares of components. We investigate how to determine the optimal adjustment by introducing a gradient method which explicitly takes account for the adjustment cost and incorporates the constraint that shares of components are summed up to one. The resulting optimal adjustment shares are proportional to the deviations from the average over elements of a gradient vector and independent from the choice of regression equations. The optimal adjustment share is completely estimated by using the linear regression with any choice of omitted variable if the adjustment cost is given. The result is free from multicollinearity problem but is considering all adjustment costs unlike most of previous researches. The paper also provides an illustrative example taken from the annual panel data for the Japanese prefectural governments.
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Bibliographic InfoPaper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 07-17.
Length: 33 pages
Date of creation: May 2007
Date of revision:
Economic growth; Public expenditure composition; Adjustment;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-12 (All new papers)
- NEP-MAC-2007-05-12 (Macroeconomics)
- NEP-PBE-2007-05-12 (Public Economics)
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