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Risk, productive government expenditure, and the world economy

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  • Inaki Erauskin-Iurrita

    (University of Deusto San Sebastian)

Abstract

This paper analyzes the expenditure policy of the public sector and risk in a two-country stochastic AK growth model, provided that public spending is productivity- and volatility-enhancing. First we derive the world macroeconomic equilibrium. Then we study the impact of changes in exogenous variables on consumption, growth, and welfare. Next, we show that consumption-wealth ratio and welfare should be higher in an open economy than in a closed economy. We discuss whether open economies grow more than closed economies. Then the optimal size of the public sector is derived in two different scenarios in an open economy. We get that the size of the public sector which maximizes welfare is lower than that which maximizes growth. Finally, we analyze whether more open economies are associated with a higher optimal size of the public sector. The optimal size in an open economy can be higher than that in a closed economy for two reasons: different marginal impact of public spending on productivity and risk diversification.

Suggested Citation

  • Inaki Erauskin-Iurrita, 2004. "Risk, productive government expenditure, and the world economy," International Finance 0412003, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpif:0412003
    Note: Type of Document - pdf; pages: 30
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0412/0412003.pdf
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    References listed on IDEAS

    as
    1. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    2. 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.
    3. 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.
    4. 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 103-126, October.
    5. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
    6. Jacob Frenkel & Assaf Razin, 1996. "Fiscal Policies and Growth in the World Economy," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262561042, January.
    7. Lejour, A.M. & Verbon, H.A.A., 1996. "Fiscal Policies and Endogenous Growth in Integrated Capital Markets," Discussion Paper 1996-76, Tilburg University, Center for Economic Research.
    8. Corsetti, Giancarlo, 1997. "A portfolio approach to endogenous growth: equilibrium and optimal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 21(10), pages 1627-1644, August.
    9. Robert J. Barro & Xavier Sala-I-Martin, 1992. "Public Finance in Models of Economic Growth," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 645-661.
    10. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    11. D. Fiaschi, 1996. "Fiscal policies and growth," Working Papers 261, Dipartimento Scienze Economiche, Universita' di Bologna.
    12. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
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    More about this item

    Keywords

    risk; productive government expenditure; consumption; growth; welfare; optimal size of the public sector;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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