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The Impact of Government Spending Levels on Medium-Term Economic Growth in the Oecd, 1960-85

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  • Francis G. Castles
  • Steve Dowrick

Abstract

Recent findings concerning the impact of government spending on economic growth have been as diverse as the theories underpinning them. Proceeding from a methodological critique of prior work in the field and drawing on a variety of methodological innovations suggested in recent studies, we seek to design rigorous tests using cross-section data from 18 OECD countries over four business cycles between 1960 and 1985. Government expenditure is decomposed into various categories and economic growth is corrected for cyclical disturbances. We also control for the effects of technological catch-up, institutional sclerosis and population growth along with the mediating influences of investment and employment. A variety of diagnostic statistical tests are applied, including tests for parameter stability across countries and across periods and tests for heteroscedasticity, functional form, outliers and endogeneity. We reject the hypothesis that government expenditures reduce economic growth and indicate some areas of social expenditures which may possibly tend to increase growth. We are also able to indicate the methodological assumptions and restrictions which have led to previous contrary findings.

Suggested Citation

  • Francis G. Castles & Steve Dowrick, 1990. "The Impact of Government Spending Levels on Medium-Term Economic Growth in the Oecd, 1960-85," Journal of Theoretical Politics, , vol. 2(2), pages 173-204, April.
    • Handle: RePEc:sae:jothpo:v:2:y:1990:i:2:p:173-204
    DOI: 10.1177/0951692890002002003
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    References listed on IDEAS

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    Cited by:

    1. Frank Castles, 1999. "Decentralization and the Post-War Political Economy," CEPR Discussion Papers 399, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    2. Etayankara Muralidharan & Saurav Pathak, 2018. "Sustainability, Transformational Leadership, and Social Entrepreneurship," Sustainability, MDPI, vol. 10(2), pages 1-22, February.
    3. Cusack, Thomas R., 1995. "Politics and macroeconomic performance in the OECD countries," Discussion Papers, Research Unit: Economic Change and Employment FS I 95-315, WZB Berlin Social Science Center.
    4. Kneller, Richard, 2000. "The Implications of the Comprehensive Spending Review for the Long-Run Growth Rate: a View From the Literature," National Institute Economic Review, National Institute of Economic and Social Research, vol. 171, pages 94-105, January.
    5. Huo, Jingjing, 2015. "How Nations Innovate: The Political Economy of Technological Innovation in Affluent Capitalist Economies," OUP Catalogue, Oxford University Press, number 9780198735847.
    6. Erich Weede, 1991. "The impact of state power on economic growth rates in OECD countries," Quality & Quantity: International Journal of Methodology, Springer, vol. 25(4), pages 421-438, November.

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