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Are Government Expenditures Productive? Measuring the Effect on Private Sector Production


  • Kiander, Jaakko
  • Hjerppe, Reino
  • Virén, Matti


This paper analyses the productivity of public expenditures. It follows the branch of literature originated by Aschauer but has also some novel features. First of all, it focuses on the effect of both public investment and public consumption (investment part of public consumption) on private sector productivity. Secondly, empirical evidence is derived from relative large cross-country data that cover more than three decades. For the testing purpose, it uses a production function approach in which (alternative definitions of) public sector capital stocks are allowed to affect total factor productivity. The production relationships are estimated from a panel data that are derived from the data banks of OECD and the World Bank. Empirical findings suggest that, to some extent, the significant deceleration of economic growth in many OECD countries during the last two decades can, in the same way as in the original Aschauer analysis with the US data, be explained by a secular decrease in public sector investment.

Suggested Citation

  • Kiander, Jaakko & Hjerppe, Reino & Virén, Matti, 2006. "Are Government Expenditures Productive? Measuring the Effect on Private Sector Production," Discussion Papers 381, VATT Institute for Economic Research.
  • Handle: RePEc:fer:dpaper:381

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    Cited by:

    1. Vasilev, Aleksandar, 2013. "Fiscal policy in a Real-Business-Cycle model with labor-intensive government services and endogenous public sector wages and hours," EconStor Preprints 142338, ZBW - German National Library of Economics.
    2. Aleksandar Vasilev, 2013. "On the cost of rent-seeking by government bureaucrats in a Real-Business-Cycle framework," Working Papers 2013_20, Business School - Economics, University of Glasgow.
    3. Vasilev, Aleksandar, 2013. "Essays on Real Business Cycle Modeling and the Public Sector," EconStor Theses, ZBW - German National Library of Economics, number 130522.


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