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A Multi-sector Model of Public Expenditure and Growth

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  • Lifeng Zhang

Abstract

A large and rich body of empirical and theoretical research examines the role of public expenditure in fostering economic growth. This paper develops a model of endogenous growth with a particular focus on the role of public expenditure in structural changes. We consider the dynamics of a multi-sector economy that allows for differences among sectors in the output elasticity of public expenditure, and demonstrate that there exists a unique balanced growth path that is locally saddle-path stable. Along the balanced growth path, the endogenous growth of public expenditure and its disproportionate effect on different sectors result in changes in the relative prices of goods, which, in turn, cause structural changes represented by a reallocation of resources across sectors. Quantitatively, the faster the economic growth triggered by the policy, the greater the changes in the reallocation of labor. Copyright Springer-Verlag Wien 2015

Suggested Citation

  • Lifeng Zhang, 2015. "A Multi-sector Model of Public Expenditure and Growth," Journal of Economics, Springer, vol. 115(1), pages 73-93, May.
  • Handle: RePEc:kap:jeczfn:v:115:y:2015:i:1:p:73-93
    DOI: 10.1007/s00712-014-0408-2
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    Cited by:

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    2. 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.
    3. Mitra, Shalini, 2017. "To tax or not to tax? When does it matter for informality?," Economic Modelling, Elsevier, vol. 64(C), pages 117-127.
    4. Rosas Martínez, Víctor Hugo, 2022. "A theoretical Assessment: The Limit of Governmental Expenditures or Investments on Economic Growth," MPRA Paper 114698, University Library of Munich, Germany.
    5. Sugata Marjit & Ritwik Sasmal & Joydeb Sasmal, 2020. "Structural Transformation, Service Sector Growth and Poverty Alleviation: The Role of Formal–Informal Interaction and Rising Informal Wage," Review of Development and Change, , vol. 25(2), pages 151-168, December.
    6. Aurora A. C. Teixeira & N. Renuga Nagarajan & Sandra T. Silva, 2017. "The Impact of Ageing and the Speed of Ageing on the Economic Growth of Least Developed, Emerging and Developed Countries, 1990–2013," Review of Development Economics, Wiley Blackwell, vol. 21(3), pages 909-934, August.
    7. Sacchidananda Mukherjee & Shivani Badola, 2021. "Public Financing of Human Development in India: A Review," Indian Journal of Human Development, , vol. 15(1), pages 62-81, April.

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    More about this item

    Keywords

    Public expenditure; Multi-sector growth; Structural change; Resource reallocation; H11; O41; E62;
    All these keywords.

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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