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Public Expenditure Composition and Economic Growth: Optimal Adjustment by Using Gradient Method

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  • Tatsuyoshi Miyakoshi

    ()
    (Osaka School of International Public Policy, Osaka University)

  • Yoshihiko Tsukuda

    (Graduate School of Economics, Tohoku University)

  • Tatsuhito Kono

    (Graduate School of Engineering, Tohoku University)

  • Makoto Koyanagi

    (Graduate School of Economics, Tohoku University)

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    Abstract

    Previous 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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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0717.pdf
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    Bibliographic Info

    Paper 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.

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    Length: 33 pages
    Date of creation: May 2007
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    Handle: RePEc:osk:wpaper:0717

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Keywords: Economic growth; Public expenditure composition; Adjustment;

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    1. Xie, Danyang & Zou, Heng-fu & Davoodi, Hamid, 1999. "Fiscal Decentralization and Economic Growth in the United States," Journal of Urban Economics, Elsevier, vol. 45(2), pages 228-239, March.
    2. Asea, Patrick & Mendoza, Enrique G & Milesi-Ferretti, Gian Maria, 1996. "On the Ineffectiveness of Tax Policy in Altering Long- Run Growth: Harberger's Superneutrality Conjecture," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1378, C.E.P.R. Discussion Papers.
    3. Davoodi, Hamid & Zou, Heng-fu, 1998. "Fiscal Decentralization and Economic Growth: A Cross-Country Study," Journal of Urban Economics, Elsevier, vol. 43(2), pages 244-257, March.
    4. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
    5. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
    6. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, Elsevier, vol. 74(2), pages 171-190, November.
    7. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(2-3), pages 313-344, April.
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