Is public expenditure productive

https://www.mathematik.uni-ulm.de/wipo/lehre/ws200708/public_economics/Kneller_Bleaney_Gemmell

Fiscal policy and growth: evidence from OECD countries

This paper provides a review of the theory of the determinants of individual and national thrift that has come to be known as the Life Cycle Hypothesis (LCH) of saving. Applications to some current policy issues are also discussed. Part I deals with the state of the art on the eve of the formulation of the LCH some 30 years ago. Part II sets forth the theoretical foundations of the model in its original formulation and later amendment, calling attention to various implications, distinctive to it and, sometimes, counter-intuitive. It also includes a review of a number of crucial empirical tests, both at the individual and the aggregate level. Part III reviews some applications of LCH to current policy issues, though only in sketchy fashion, as space constraints prevent fuller discussion.(This abstract was borrowed from another version of this item.)

Life Cycle, Individual Thrift and the Wealth of Nations

In this paper, we examine the growth effects of government expenditure for a panel of 30 developing countries over the 1970s and 1980s, with a particular focus on disaggregated government expenditures. Our methodology improves on previous research on this topic by explicitly recognizing the role of the government budget constraint and the possible biases arising from omitted variables. Our primary results are twofold. First, the share of government capital expenditure in GDP is positively and significantly correlated with economic growth, but current expenditure is insignificant. Second, at the disaggregated level, government investment in education and total expenditures in education are the only outlays that are significantly associated with growth once the budget constraint and omitted variables are taken into consideration.

Public expenditure and economic growth: a disaggregated analysis for developing countries*

Endogenous growth models, such as Barro (1990), predict that government expenditure and taxation will have both temporary and permanent effects on growth. We test this prediction using panels of annual and period-averaged data for OECD countries during 1970–95, isolating long-run from short-run fiscal effects. Our results strongly support the endogenous growth model and suggest that long-run fiscal effects are not fully captured by period averaging and static panel methods. Unlike previous investigations, our estimates are free from biases associated with incomplete specification of the government budget constraint and do not appear to result from endogeneity of fiscal or investment variables. JEL Classification: H30, O40

Validation du modele de croissance endogene: depenses publiques, fiscalite et croissance a long terme. Des modeles de croissance endogene comme celui de Barro (1990) predisent que depenses gouvernementales et fiscalite vont avoir des effets temporaires et permanents sur la croissance. On met cette prevision au test a l'aide de donnees annuelles et pour certaines moyennes couvrant des sous-periodes pour les pays de l'OCDE (1970–95) dans le but de departager les effets a court et a long terme. Les resultats valident fortement le modele de croissance endogene et suggerent que les effets fiscaux a long terme ne sont pas pleinement captures par des methodes utilisant des moyennes ou des methodes statiques. Contrairement aux resultats d'enquetes anterieures, les resultats proposes ne souffrent pas de distorsions attribuables a une specification incomplete de la contrainte budgetaire du gouvernement, et ne semblent pas etre l'effet d'echo de l'endogeneite des variables fiscales et de l'investissement.

https://www.jstor.org/stable/pdfplus/2667400.pdf

Testing the endogenous growth model: public expenditure, taxation, and growth over the long run

Several interesting papers have recently considered whether government taxes Granger cause government spending or vice versa. The findings, based on standard Granger [6] causality tests, are not consistent. Manage and Marlow [10] conclude that when evidence of one-way causality exists, federal taxes Granger cause federal spending, while Anderson, Wallace, and Warner [1] conclude that the evidence supports one-way causality in the opposite direction. Ram [11], reexamining the issue, concludes that taxes Granger cause spending at the federal level, but that spending Granger causes taxes at the state and local level. Von Furstenberg, Green, and Jeong [13], in another related article, examine the tax and spend, spend and tax causality issue using a more general vector autoregressive (VAR) model. They introduce, in addition to federal taxes and spending, two economic variables-the GNP gap and the inflation rate, decompose federal spending into several categories, and remove the effects of automatic stabilizers when appropriate. They find little evidence that taxes Granger cause spending, and limited evidence that spending causes taxes-a finding which corresponds most closely to that of Anderson, Wallace, and Warner [1]. Our purpose is to reconsider the causality issue with the aid of co-integration and errorcorrection modeling. Our analysis illustrates with a specific example how sources of causality can be neglected in standard Granger causality tests. Moreover, addressing the question of temporal causality between government taxes and spending provides insight as to how different policies might, or might not, help control the growth of government. The results of our estimating various co-integration and error-correction models with quarterly data suggest bi-directional causality between government taxes and spending, both for the federal, and state and local sectors. This finding counters the conclusions of previous studies. When annual data are used, however, our

Co-Integration and Error-Correction Models: The Temporal Causality between Government Taxes and Spending

I. INTRODUCTION A large and growing body of literature searches for the determinants of economic growth employing cross-country regression analysis (e.g., Kormendi and Meguire [1985], Grier and Tullock [1989], Barro [1990; 1991; 1992], Romer [1989; 1990], Levine [1991], and Levine and Renelt [1992]).(1) The cross-country regression approach implicitly assumes that the growth process possesses similar structural properties across the countries in the sample. Structural differences, be they political, economic, social, or other, between countries, therefore, do not condition the growth process. Or if they do, then the effects are randomly distributed with zero mean. If structural differences between countries do matter significantly and non-randomly in the growth process, then the existing cross-country research is potentially flawed. Attempts are sometimes made to control for such differences by including dummy variables for different regions of the world (e.g., dummy variables for African, Latin American, and other groups of countries). Within the literature on the determinants of economic growth, some papers (e.g., Landau [1983; 1985; 1986], Kormendi and Meguire [1985], Ram [1986], Koester and Kormendi [1989], Barth, Keleher, and Russek [1990], Easterly and Rebelo [1993], and Fischer [1993]) consider the effects, if any, of government expenditure and revenue on economic growth. Overall, the findings of these studies paint a mixed picture; the relationship between growth and government is sometimes significant and positive, sometimes significant and negative, and sometimes not significant. Although these studies consider many different fiscal variables, they do not as a rule examine the effects of these fiscal variables in a systematic way that controls for the mode of financing. They generally overlook, for example, how an increase in government consumption expenditure is financed. Is it with higher taxes, and which taxes? Or is it with lower spending, and which spending? Finally, is it with a larger deficit? Controlling for these factors may lead to different findings about the effect of an increase in government consumption expenditure on economic growth. Borrowing from some work on the effect of fiscal structure on national economic growth within the United States in Helms [1985], Mofidi and Stone [1990], and Miller and Russek [1993], we introduce the government budget constraint into the regression equations that examine the determinants of economic growth. As a result, we directly address the three financing questions raised in the previous paragraph. In this framework, we consider the growth process using pooled times-series, cross-section data and comparing the results from fixed- and random-effects econometric techniques.(2) These techniques attempt to accommodate structural differences between countries and across time. We also compare the performance of the more-standard ordinary least squares regression approach with that of the fixed- and random-effect models. II. AN OVERVIEW OF INTERNATIONAL FISCAL STRUCTURES Before presenting our model and statistical findings, a brief overview of the growth and fiscal characteristics of the countries in our sample provides some additional information for those not familiar with the data, which otherwise would not be revealed by our analysis.(3) This information can contribute in a limited way to the debate about the effects of government on economic growth, although it is not a substitute for modeling the growth process. For the sample as a whole, the growth rate of real per capita gross domestic product (GDP) averaged 1.35% per year during 1975 to 1984, with a coefficient of variation of 3.52. By comparison, the average growth rate in the United States was 1.45%. The five fastest growth countries were Botswana (6.72), Indonesia (4.19), Korea (6.32), Sri Lanka (3.20), and Thailand (4.31). The five slowest growth countries were El Salvador (-1. …

Fiscal structures and economic growth: international evidence

The emergence of record current-account and fiscal deficits in the United States during the 1980s draws increasing attention to what has become known as the “twin deficit” problem. Conventional wisdom is that a shift to larger government deficits entails a decline in government saving and results in larger trade deficits, Persistently large trade deficits are troublesome because they imply a transfer of wealth to foreigners and possibly a reduction in future generations' living standards.



This paper examines whether post-World War II data for the United States reveal a long-run secular relationship between the trade deficit and the fiscal deficit. The focus is on the secular relationship since that is the one most relevant to long-run policy concerns. The authors employ three different statistical techniques: (i) a deterministic technique for separating the secular components from the cyclical components to derive secular measures of the twin deficits, (ii) a stochastic procedure to isolate the secular components, (Hi) cointegration analysis to test for a long-run equilibrium relationship.



The authors conclude that, based on the first two approaches, evidence of a positive secular relationship between the twin deficits exists only under flexible exchange rates. This relationship appears quite strong–that is, a $1 change in the fiscal deficit eventually leads to roughly a $1 change in the trade deficit. On the other hand, findings based on cointegration analysis indicate no long-run equilibrium relationship between the twin deficits. This latter finding, however, may reflect a low power of the relevant statistical tests stemming from the shortness of the sample period.

Are the twin deficits really related

This paper reviews competing views regarding interest rates and other economic effects of federal deficits. It discusses the findings of several empirical studies that have analyzed these relationships. The main points ofthe paper are that: (a) the con-cept of the deficit is ambiguous because not all deficits have the same economic effects, and (b) by slightly modifying existing studies, one is able to produce empirical evidence showing that deficits or debt do indeed raise interest rates and otherwise affect economic activity in ways consistent with the conven-tional view.

Frank S. Russek

Papers

Co-Integration and Error-Correction Models: The Temporal Causality between Government Taxes and Spending

Fiscal structures and economic growth: international evidence

Are the twin deficits really related

Do federal deficits really matter

Federal Borrowing and Short Term Interest Rates: Comment