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Welfare implications of public education spending rules

  • Konstantinos Angelopoulos
  • Jim Malley
  • Apostolis Philippopoulos

In this paper, we quantitatively assess the welfare implications of alternative public education spending rules. To this end, we employ a dynamic stochastic general equilibrium model in which human capital externalities and public education expenditures, financed by distort- ing taxes, enhance the productivity of private education choices. We allow public education spending, as share of output, to respond to various aggregate indicators in an attempt to minimize the market imperfection due to human capital externalities. We also expose the economy to varying degrees of uncertainty via changes in the variance of total factor productivity shocks. Our results indicate that, in the face of increasing aggregate uncertainty, active policy can signi.cantly outperform passive policy (i.e. maintaining a constant public educa- tion to output ratio) but only when the policy instrument is successful in smoothing the growth rate of human capital.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2008_37.

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Date of creation: Dec 2008
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Handle: RePEc:gla:glaewp:2008_37
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