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Fiscal policy, public expenditure composition and growth. theory and empirics

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  • Willi, Semmlero
  • Alfred, Greiner
  • Bobo, Diallo
  • Anand, Rajaram
  • Armon, Rezai

Abstract

This paper responds to the development policy debate involving the World Bank and the IMF on the use of fiscal policy not only for economic stabilization but also to promote economic growth and increase per capita income. A key issue in this debate relates to the effect of the composition of public expenditure on economic growth. Policy makers and some researchers have argued that expenditure on growth-enhancing functions could enhance future revenue and justify the provision of "fiscal space" in the budget. But there are no simple ways to identify the growth-maximizing composition of public expenditure. The current paper lays out a research strategy to explore the effects of fiscal policy, including the composition of public expenditure, on economic growth, using a time series approach. Based on the modeling strategy of Greiner, Semmler and Gong (2005) we develop a general model that features a government that undertakes public expenditure on (a) education and health facilities which enhance human capital, (b) public infrastructure such as roads and bridges necessary for market activity, (c) public administration to support government functions, (d) transfers and public consumption facilities, and (e) debt service. The proposed model is numerically solved, calibrated and the impact of the composition of public expenditure on the long-run per capita income explored for low-, lower-middle- and uppermiddle-income countries. Policy implications and practical policy rules are spelled out, the extension to an estimable model indicated, a debt sustainability test proposed, and the out-of-steady-state dynamics studied.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35997.

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Date of creation: Jul 2011
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Handle: RePEc:pra:mprapa:35997

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Keywords: Infrastructure investment; Economic growth; Compostion of the public budget; Financing public expenditures; Public deficit; Public debt;

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Citations

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Cited by:
  1. Florian Misch & Norman Gemmell & Richard Kneller, . "Growth and Welfare Maximization in Models of Public Finance and Endogenous Growth," Discussion Papers 08/09, University of Nottingham, CREDIT.
  2. Prakash Kumar Shrestha, 2009. "The Composition of Public Expenditure, Physical Infrastructure and Economic Growth in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 21, pages 4, April.
  3. Leonor Coutinho & Luc De Wulf & Santiago Florez & Cyrus Sassanpour, 2010. "Study on Quality of Public Finances in Support of Growth in the Mediterranean Partner Countries of the EU," CASE Network Reports 0094, CASE-Center for Social and Economic Research.
  4. Case, 2009. "Study on quality of public finances in support of growth in the Mediterranean partner countries of the EU," European Economy - Economic Papers 394, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  5. Hans Pitlik & Margit Schratzenstaller, 2011. "Growth Implications of Structure and Size of Public Sectors," WIFO Working Papers 404, WIFO.
  6. Misch, Florian & Gemmell, Norman & Kneller, Richard, 2014. "Using Surveys of Business Perceptions as a Guide to Growth-Enhancing Fiscal Reforms," Working Paper Series 3140, Victoria University of Wellington, Chair in Public Finance.

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