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Effects of Growth and Volatility in Public Expenditures on Economic Growth: Theory and Evidence

  • Liutang Gong

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University)

  • Heng-fu Zou

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University
    Development Research Group, The World Bank)

This paper sets up a theoretical model linking the growth rate of the economy to the growth rate and volatility of different government expenditures. On a theoretical basis, it is found that volatility in government spending can be positively or negatively associated with economic growth depending on the intertemporal elasticity in consumption. On an empirical basis, it is rather surprising to find no association between growth in capital expenditure and output growth, whereas growth in current expenditure seems to stimulate output growth. In particular, growth in transportation and communication seems to have a negative effect on output growth. It is also very interesting to find that the rises in the volatility in the growth of general public services, transportation, and communication have a positive effect on output growth.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 494.

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Length: 28 pages
Date of creation: 2011
Date of revision:
Publication status: Published in Annals of Economics and Finance, Society for AEF, vol. 3(2), pages 379-406, November.
Handle: RePEc:cuf:wpaper:494
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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  1. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  2. Roubini, Nouriel & Swagel, Phillip & Ozler, Sule & Alesina, Alberto, 1996. "Political Instability and Economic Growth," Scholarly Articles 4553024, Harvard University Department of Economics.
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  8. Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers 885, C.E.P.R. Discussion Papers.
  9. Jonathan Eaton, 1981. "Fiscal Policy, Inflation and the Accumulation of Risky Capital," Review of Economic Studies, Oxford University Press, vol. 48(3), pages 435-445.
  10. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
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  12. Sam Peltzman, 1980. "The Growth of Government," University of Chicago - George G. Stigler Center for Study of Economy and State 1, Chicago - Center for Study of Economy and State.
  13. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
  14. Turnovsky, Stephen J, 1993. "Macroeconomic Policies, Growth, and Welfare in a Stochastic Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 953-81, November.
  15. Alesina, Alberto, et al, 1996. "Political Instability and Economic Growth," Journal of Economic Growth, Springer, vol. 1(2), pages 189-211, June.
  16. Turnovsky, Stephen J. & Fisher, Walter H., 1995. "The composition of government expenditure and its consequences for macroeconomic performance," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 747-786, May.
  17. Gali, Jordi, 1994. "Government size and macroeconomic stability," European Economic Review, Elsevier, vol. 38(1), pages 117-132, January.
  18. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 465-490.
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