Balanced Budget Government Spending in a Small Open Regional Economy
Balanced Budget Government Spending in a Small Open Regional Economy P. Lecca, P.G. McGregor and J.K. Swales Department of Economics, University of Strathclyde Abstract Scotland is engaged in a lively and on-going debate on greater fiscal autonomy and independence, which is politically controversial, especially in respect of tax-varying powers. The Scottish Parliament has the power to make a balanced-budget adjustment in public expenditure by varying the basic rate of income tax. While this power has not so far been used, there is considerable pressure further to increase the fiscal powers of the Scottish Government. The object of this paper is to explore and quantify a number of typical balanced-budget government spending shocks. Here we seek to draw on lessons from recent macroeconomic analyses of fiscal policy, but we adapt them to an explicitly regional context. The regional dimension of the analysis is captured through application to a regional economy characterised by: highly open goods markets in which import and export to GDP ratios are much higher than for the national economy; highly open labour markets characterised by the presence of migration and national and regional wage bargaining institutions; financial markets that are perfectly integrated with the national economy with which the region shares a permanently fixed exchange rate. Furthermore, the macroeconomic â€œclosuresâ€ of the model are those appropriate to a region, reflecting an institutional structure in which, for example, the system of national transfers moderates the operation of regional adjustment mechanisms. We develop an intertemporal variant of, AMOS, a computable general equilibrium (CGE) model for Scotland to explore the kinds of balanced-budget fiscal expansions that the Scottish Government could pursue. In response to a balanced budget fiscal expansion the model suggests that: an increase in current government purchase in goods and services has negative multiplier effects only if the elasticity of substitution between private and public consumption is high enough to move downward the marginal utility of private consumers; public capital expenditure crowds in consumption and investment but crowding out effects might arise in the short-run if agents are myopic. The distinctive results for public capital expenditure suggest that the current restriction on the composition of Scottish government expenditures is a very significant one. JEL Classifications: C68, D58, H71, H72, R13, R50. Key words: regional computable general equilibrium analysis, fiscal federalism, fiscal policy.
|Date of creation:||Oct 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.ersa.org
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Aschauer, 1988.
"Is public expenditure productive?,"
88-7, Federal Reserve Bank of Chicago.
- Devereux, Michael B & Head, Allen C & Lapham, Beverly J, 1996. "Monopolistic Competition, Increasing Returns, and the Effects of Government Spending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 233-54, May.
- Barro, Robert J, 1990.
"Government Spending in a Simple Model of Endogenous Growth,"
Journal of Political Economy,
University of Chicago Press, vol. 98(5), pages S103-26, October.
- Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
- Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
- Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
- Lynde, Catherine & Richmond, J, 1993. "Public Capital and Long-Run Costs in U.K. Manufacturing," Economic Journal, Royal Economic Society, vol. 103(419), pages 880-93, July.
- Alonso-Carrera, Jaime & Freire-Serén, María Jesús & Manzano, Baltasar, 2009. "Macroeconomic effects of the regional allocation of public capital formation," Regional Science and Urban Economics, Elsevier, vol. 39(5), pages 563-574, September.
- Aschauer, David Alan, 1989.
"Does public capital crowd out private capital?,"
Journal of Monetary Economics,
Elsevier, vol. 24(2), pages 171-188, September.
- Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March.
- Campbell, John, 1994.
"Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model,"
3196342, Harvard University Department of Economics.
- Campbell, John Y., 1994. "Inspecting the mechanism: An analytical approach to the stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 463-506, June.
- John Y. Campbell, 1992. "Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model," NBER Working Papers 4188, National Bureau of Economic Research, Inc.
- Been-Lon Chen, 2003.
"Factor Taxation and Labor Supply In A Dynamic One-Sector Growth Model,"
IEAS Working Paper : academic research
03-A006, Institute of Economics, Academia Sinica, Taipei, Taiwan.
- Chen, Been-Lon, 2007. "Factor taxation and labor supply in a dynamic one-sector growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(12), pages 3941-3964, December.
- Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-25, December.
- Nicolaas Groenewold & Alfred Hagger & John Madden, 2003.
"Interregional transfers: A political-economy CGE approach,"
Papers in Regional Science,
Springer, vol. 82(4), pages 535-554, November.
- Nicolaas Groenewold & Alfred Hagger & John Madden, 2003. "Interregional transfers: A political-economy CGE approach," Economics of Governance, Springer, vol. 82(4), pages 535-554, November.
- Barro, Robert J, 1981.
"Output Effects of Government Purchases,"
Journal of Political Economy,
University of Chicago Press, vol. 89(6), pages 1086-1121, December.
- Linnemann, Ludger & Schabert, Andreas, 2004. "Can fiscal spending stimulate private consumption?," Economics Letters, Elsevier, vol. 82(2), pages 173-179, February.
- Robert A. Amano & Tony S. Wirjanto, 1997. "Intratemporal Substitution And Government Spending," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 605-609, November.
- Richard Blundell & Martin Browning & Costas Meghir, 1993.
"Consumer demand and the life-cycle allocation of household expenditures,"
IFS Working Papers
W93/11, Institute for Fiscal Studies.
- Blundell, Richard & Browning, Martin & Meghir, Costas, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 57-80, January.
- Nicolaas Groenewold & Alfred J. Hagger & John R. Madden, 2001. "Competitive Federalism: A Political-Economy General Equilibrium Approach," Economics Discussion / Working Papers 01-10, The University of Western Australia, Department of Economics.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005.
"Unemployment: Macroeconomic Performance and the Labour Market,"
Oxford University Press, number 9780199279173, March.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, March.
- Ho, Tsung-wu, 2001. "The government spending and private consumption: a panel cointegration analysis," International Review of Economics & Finance, Elsevier, vol. 10(1), pages 95-108.
- Mark Partridge & Dan Rickman, 2010. "Computable General Equilibrium (CGE) Modelling for Regional Economic Development Analysis," Regional Studies, Taylor & Francis Journals, vol. 44(10), pages 1311-1328.
- Patrizio Lecca & Peter McGregor & Kim Swales, 2011.
"Forward Looking and Myopic Regional Computable General Equilibrium Models. How Significant is the Distinction?,"
1133, University of Strathclyde Business School, Department of Economics.
- Lecca, Patrizio & McGregor, Peter G. & Swales, J. Kim, 2013. "Forward-looking and myopic regional Computable General Equilibrium models: How significant is the distinction?," Economic Modelling, Elsevier, vol. 31(C), pages 160-176.
- Lecca, Patrizio & McGregor, Peter G. & Swales, Kim, 2012. "Forward Looking and Myopic Regional Computable General Equilibrium Models. How Significant is the Distinction?," SIRE Discussion Papers 2012-62, Scottish Institute for Research in Economics (SIRE).
- Christophe Kamps, 2006.
"New Estimates of Government Net Capital Stocks for 22 OECD Countries, 1960-2001,"
IMF Staff Papers,
Palgrave Macmillan, vol. 53(1), pages 6.
- Christophe Kamps, 2005. "New Estimates of Government Net Capital Stocks for 22 OECD Countries 1960-2001," Public Economics 0506015, EconWPA.
- Christophe Kamps, 2004. "New Estimates of Government Net Capital Stocks for 22 OECD Countries 1960-2001," IMF Working Papers 04/67, International Monetary Fund.
- 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.
- Ganelli, Giovanni & Tervala, Juha, 2009. "Can government spending increase private consumption? The role of complementarity," Economics Letters, Elsevier, vol. 103(1), pages 5-7, April.
- Mark D. Partridge & Dan S. Rickman, 1998. "Regional Computable General Equilibrium Modeling: A Survey and Critical Appraisal," International Regional Science Review, , vol. 21(3), pages 205-248, December.
- Batey, Peter W. J. & Madden, Moss, 1983. "The modelling of demographic-economic change within the context of regional decline: Analytical procedures and empirical results," Socio-Economic Planning Sciences, Elsevier, vol. 17(5-6), pages 315-328.
- David Alan Aschauer, 1986.
"The equilibrium approach to fiscal policy,"
86-2, Federal Reserve Bank of Chicago.
- Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
- Fisher, Walter H & Turnovsky, Stephen J, 1998. "Public Investment, Congestion, and Private Capital Accumulation," Economic Journal, Royal Economic Society, vol. 108(447), pages 399-413, March.
- Harrigan, Frank & McGregor, Peter G. & Dourmashkin, Neil & Perman, Roger & Swales, Kim & Yin, Ya Ping, 1991. "AMOS : A macro-micro model of Scotland," Economic Modelling, Elsevier, vol. 8(4), pages 424-479, October.
- Robinson, Sherman & Cattaneo, Andrea & El-Said, Moataz, 2000.
"Updating and estimating a Social Accounting Matrix using cross entropy methods,"
TMD discussion papers
58, International Food Policy Research Institute (IFPRI).
- Sherman Robinson & Andrea Cattaneo & Moataz El-Said, 2001. "Updating and Estimating a Social Accounting Matrix Using Cross Entropy Methods," Economic Systems Research, Taylor & Francis Journals, vol. 13(1), pages 47-64.
- Ni, Shawn, 1995. "An empirical analysis on the substitutability between private consumption and government purchases," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 593-605, December.
- Baxter, Marianne & King, Robert G, 1993.
"Fiscal Policy in General Equilibrium,"
American Economic Review,
American Economic Association, vol. 83(3), pages 315-34, June.
- Holtz-Eakin, Douglas, 1993. "State-specific estimates of state and local government capital," Regional Science and Urban Economics, Elsevier, vol. 23(2), pages 185-209, April.
- Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
- Olivier Blanchard & Roberto Perotti, 1999.
"An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output,"
NBER Working Papers
7269, National Bureau of Economic Research, Inc.
- Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
When requesting a correction, please mention this item's handle: RePEc:wiw:wiwrsa:ersa12p1009. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gunther Maier)
If references are entirely missing, you can add them using this form.