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The composition of productive government expenditure: Consequences for economic growth and welfare

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  • Goncalo Monteiro
  • Stephen J. Turnovsky

Abstract

Purpose - Recent research supports the role of productive government spending as an important determinant of economic growth. Previous analyses have focused on the separate effects of public investment in infrastructure and on investment in education. This paper aims to introduce both types of public investment simultaneously, enabling the authors to address the trade-offs that resource constraints may impose on their choice. Design/methodology/approach - The authors employ a two-sector endogenous growth model, with physical and human capital. Physical capital is produced in the final output sector, using human capital, physical capital, and government spending on infrastructure. Human capital is produced in the education sector using human capital, physical capital, and government spending on public education. The introduction of productive government spending in both sectors yields an important structural difference from the traditional two-sector growth models in that the relative price of human to physical capital dynamics does not evolve independently of the quantity dynamics. Findings - The model yields both a long-run growth-maximizing and welfare-maximizing expenditure rate and allocation of expenditure on productive capital. The welfare-maximizing rate of expenditure is less than the growth-maximizing rate, with the opposite being the case with regard to their allocation. Moreover, the growth-maximizing value of the expenditure rate is independent of the composition of government spending, and vice versa. Because of the complexity of the model, the analysis of its dynamics requires the use of numerical simulations the specific shocks analyzed being productivity increases. During the transition, the growth rates of the two forms of capital approach their common equilibrium from opposite directions, this depending upon both the sector in which the shock occurs and the relative sectoral capital intensities. Research limitations/implications - These findings confirm that the form in which the government carries out its productive expenditures is important. The authors have retained the simpler, but widely employed, assumption that government expenditure influences private productivity as a flow. But given the importance of public investment suggests that extending this analysis to focus on public capital would be useful. Originality/value - Two-sector models of economic growth have proven to be a powerful tool for analyzing a wide range of issues in economic growth. The originality of this paper is to consider the relative impact of government spending on infrastructure and government spending on human capital and the trade-offs that they entail, both in the long run and over time.

Suggested Citation

  • Goncalo Monteiro & Stephen J. Turnovsky, 2008. "The composition of productive government expenditure: Consequences for economic growth and welfare," Indian Growth and Development Review, Emerald Group Publishing, vol. 1(1), pages 57-83, April.
  • Handle: RePEc:eme:igdrpp:v:1:y:2008:i:1:p:57-83
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    Citations

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    Cited by:

    1. Florian Misch & Norman Gemmell & Richard Kneller, 2014. "Using surveys of business perceptions as a guide to growth-enhancing fiscal reforms," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 22(4), pages 683-725, October.
    2. Florian Misch & Norman Gemmell & Richard Kneller, "undated". "Business Perceptions, Fiscal Policy and Growth," Discussion Papers 08/10, University of Nottingham, CREDIT.
    3. Simon Wiederhold, 2012. "The Role of Public Procurement in Innovation: Theory and Empirical Evidence," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 43, November.
    4. Florian Misch & Norman Gemmell & Richard Kneller, 2013. "Growth and Welfare Maximization in Models of Public Finance and Endogenous Growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(6), pages 939-967, December.
    5. Chiara DEL BO, 2009. "Recent advances in public investment, fiscal policy and growth," Departmental Working Papers 2009-25, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    6. Simon Wiederhold, 2009. "Government Spending Composition in a Simple Model of Schumpeterian Growth," Jena Economic Research Papers 2009-101, Friedrich-Schiller-University Jena.
    7. Minea, Alexandru, 2008. "The Role of Public Spending in the Growth Theory Evolution," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 5(2), pages 99-120, June.
    8. Escobar-Posada, Rolando A. & Monteiro, Goncalo, 2015. "Long-run growth and welfare in a two sector endogenous growth model with productive and non-productive government expenditure," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 218-234.
    9. Zhang, Lifeng & Ru, Yucong & Li, Jingkui, 2016. "Optimal tax structure and public expenditure composition in a simple model of endogenous growth," Economic Modelling, Elsevier, vol. 59(C), pages 352-360.

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    Keywords

    Infrastructure; Education; Economic growth; Welfare;

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