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Government Size and the Composition of Public Spending in a Neoclassical Growth Model

Abstract

This paper develops a non-linear theoretical relationship between public spending and economic growth. The model identifies the “optimal” size of government and the “optimal” composition of government spending. Given the size of the government, different allocations of public resources lead to different growth rates in the transition dynamics, depending on their elasticity. We argue that neglecting the hypothesis of non-linearity and the different impact different kinds of public spending have on economic performance results in models which suffer from mis-specification. Traditional linear regression analysis may thus be biased

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Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 200701.

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Date of creation: 2007
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Handle: RePEc:cns:cnscwp:200701
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Keywords: neoclassical and augmented growth models; fiscal policy; public spending composition;

Find related papers by JEL classification:

  • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
  • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
  • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
  • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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