IDEAS home Printed from
   My bibliography  Save this article

Liquidity Constraints, the Composition of Government Expenditure, and Economic Growth


  • Wenkai Sun
  • Xianghong Wang


This paper examines the impacts of liquidity constraints on economic growth and social welfare by incorporating the role of government expenditure into the overlapping-generations model developed by Jappelli and Pagano in 1990s. In our model, the government can provide funds to the young faced with liquidity constraints. Our theoretical findings are as follows: (1) with exogenous technical progress, liquidity constraints on households raise the saving rate; (2) with endogenous technical progress, liquidity constraints and economic growth rate show an inverted U-shaped relationship; (3) with both exogenous and endogenous technical progress, the steady state per capita income first increases and then declines with the increase of liquidity constraints. Our empirical analysis with cross-country data supported this conclusion; (4) given certain values of the model parameters, social welfare in steady state may decrease with the reduction of liquidity constraints.

Suggested Citation

  • Wenkai Sun & Xianghong Wang, 2011. "Liquidity Constraints, the Composition of Government Expenditure, and Economic Growth," Global Economic Review, Taylor & Francis Journals, vol. 40(4), pages 409-419, December.
  • Handle: RePEc:taf:glecrv:v:40:y:2011:i:4:p:409-419 DOI: 10.1080/1226508X.2011.626150

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Sourafel Girma & Yundan Gong & Holger Görg, 2008. "Foreign Direct Investment, Access to Finance, and Innovation Activity in Chinese Enterprises," World Bank Economic Review, World Bank Group, vol. 22(2), pages 367-382, June.
    2. Frederic S. Mishkin, 2006. "How Big a Problem is Too Big to Fail? A Review of Gary Stern and Ron Feldman's Too Big to Fail: The Hazards of Bank Bailouts," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 988-1004, December.
    3. Holger Görg & Eric Strobl, 2005. "Spillovers from Foreign Firms through Worker Mobility: An Empirical Investigation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(4), pages 693-709, December.
    4. Reifschneider, David & Stevenson, Rodney, 1991. "Systematic Departures from the Frontier: A Framework for the Analysis of Firm Inefficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 715-723, August.
    5. Todo, Yasuyuki & Zhang, Weiying & Zhou, Li-An, 2009. "Knowledge spillovers from FDI in China: The role of educated labor in multinational enterprises," Journal of Asian Economics, Elsevier, vol. 20(6), pages 626-639, November.
    6. Xu, Lei & Lin, Chien-Ting, 2007. "Can Chinese banks compete after accession to WTO?," Journal of Asian Economics, Elsevier, vol. 18(6), pages 883-903, December.
    7. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2009. "Bank ownership and efficiency in China: What will happen in the world's largest nation?," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 113-130, January.
    8. Crespo, Nuno & Fontoura, Maria Paula, 2007. "Determinant Factors of FDI Spillovers - What Do We Really Know?," World Development, Elsevier, vol. 35(3), pages 410-425, March.
    9. Lensink, Robert & Meesters, Aljar & Naaborg, Ilko, 2008. "Bank efficiency and foreign ownership: Do good institutions matter?," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 834-844, May.
    10. Lensink, Robert & Hermes, Niels, 2004. "The short-term effects of foreign bank entry on domestic bank behaviour: Does economic development matter?," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 553-568, March.
    11. Todo, Yasuyuki & Zhang, Weiying & Zhou, Li-An, 2009. "Knowledge Spillovers from FDI in the People's Republic of China: The Role of Educated Labor in Multinational Enterprises," ADBI Working Papers 174, Asian Development Bank Institute.
    12. Shujie Yao & Chunxia Jiang & Genfu Feng & Dirk Willenbockel, 2007. "WTO challenges and efficiency of Chinese banks," Applied Economics, Taylor & Francis Journals, vol. 39(5), pages 629-643.
    13. Sinani, Evis & Meyer, Klaus E., 2004. "Spillovers of technology transfer from FDI: the case of Estonia," Journal of Comparative Economics, Elsevier, vol. 32(3), pages 445-466, September.
    14. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-332.
    15. Lin, Xiaochi & Zhang, Yi, 2009. "Bank ownership reform and bank performance in China," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 20-29, January.
    16. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 891-911, May.
    17. Adam Blake & Ziliang Deng & Rod Falvey, 2009. "How does the productivity of foreign direct investment spill over to local firms in Chinese manufacturing?," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 7(2), pages 183-197.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:glecrv:v:40:y:2011:i:4:p:409-419. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.