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Government Expenditures and Economic Growth: The Supply and Demand Sides

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  • Pak Hung Mo

Abstract

This paper uses a new approach to estimate how government expenditures affect the growth rate of real GDP. They affect the growth rate through three channels - total factor productivity, investment and aggregate demand. We find that apart from government investment, all government expenditures have negative marginal effects on productivity and GDP growth. In particular, a 1 percentage point increase in the share of government consumption in GDP reduces the equilibrium GDP growth rate by 0.216 percentage points, while the same increase in government investment raises the growth rate by 0.167 percentage points. This suggests that a reallocation of 1 percentage point of government consumption to government investment can raise the growth rate by 0.38 percentage points. Copyright 2007 Institute for Fiscal Studies.

Suggested Citation

  • Pak Hung Mo, 2007. "Government Expenditures and Economic Growth: The Supply and Demand Sides," Fiscal Studies, Institute for Fiscal Studies, vol. 28(4), pages 497-522, December.
  • Handle: RePEc:ifs:fistud:v:28:y:2007:i:4:p:497-522
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1475-5890.2007.00065.x
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    Cited by:

    1. Sefa Awaworyi Churchill & Mehmet Ugur & Siew Ling Yew, 2017. "Does Government Size Affect Per-Capita Income Growth? A Hierarchical Meta-Regression Analysis," The Economic Record, The Economic Society of Australia, vol. 93(300), pages 142-171, March.
    2. repec:dug:actaec:y:2017:i:2:p:212-219 is not listed on IDEAS
    3. Andrés Rodríguez-Pose & Roberto Ezcurra, 2011. "Is fiscal decentralization harmful for economic growth? Evidence from the OECD countries," Journal of Economic Geography, Oxford University Press, vol. 11(4), pages 619-643, July.
    4. Diego Enrique Pinilla Rodríguez & Juan de Dios Jiménez Aguilera & Roberto Montero Granados, 2013. "Gasto público y crecimiento económico. Un estudio empírico para América Latina," REVISTA CUADERNOS DE ECONOMÍA, UN - RCE - CID, May.
    5. repec:eee:ecmode:v:64:y:2017:i:c:p:270-287 is not listed on IDEAS
    6. Awaworyi Churchill, Sefa & Yew, Siew Ling & Ugur, Mehmet, 2015. "Effects of Government Education and Health Expenditures on Economic Growth: A Meta-analysis," EconStor Preprints 110901, ZBW - German National Library of Economics.
    7. Sefa Awaworyi & Siew Ling Yew, 2014. "Government Transfers and Growth: Is there Evidence of Genuine Effect?," Monash Economics Working Papers 40-14, Monash University, Department of Economics.
    8. Nikopour, Hesam & Shah Habibullah, Muzafar, 2010. "Shadow Economy and Poverty," MPRA Paper 23599, University Library of Munich, Germany.
    9. Mo, Pak Hung, 2011. "Trade Liberalization Sequence for Sustained Economic Growth," MPRA Paper 28917, University Library of Munich, Germany.
    10. Funashima, Yoshito, 2014. "A Comprehensive Analysis of the Response of Private Consumption to Government Spending," MPRA Paper 59968, University Library of Munich, Germany.
    11. Leshoro, Temitope L A, 2017. "An empirical analysis of disaggregated government expenditure and economic growth in South Africa," Working Papers 22644, University of South Africa, Department of Economics.

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