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Government expenditure and economic growth in the EU: long-run tendencies and short-term adjustment

  • Alfonso Arpaia
  • Alessandro Turrini

This paper analyses both the long and the short-run relation between government expenditure and potential output in EU countries by means of pooled mean group estimation (Pesaran, Shin, and Smith (1999)). Results show that, over a sample comprising EU-15 countries over the 1970-2003 period, it cannot be rejected the hypothesis of a common long-term elasticity between cyclically-adjusted primary expenditure and potential output close to unity. However, the long-run elasticity decreased considerably over the decades and is significantly higher than unity in catching-up countries, in fast-ageing countries, in low-debt countries, and in countries with weak numerical rules for the control of government spending. The average speed of adjustment of government expenditure to its long-tem relation is 3 years, but there are significant differences across countries. Anglo-Saxon and Nordic countries exhibit in general a faster adjustment process, while adjustment in Southern European countries appears somehow slower.

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File URL: http://ec.europa.eu/economy_finance/publications/publication12024_en.pdf
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Paper provided by Directorate General Economic and Financial Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 300.

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Length: 52 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:euf:ecopap:0300
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