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Fiscal Policy, Public Expenditure Composition, and Growth: Theory and Empirics

Semmler, Willi and Greiner, Alfred and Diallo, Bobo and Rajaram, Anand and Rezai, Armon (2011) Fiscal Policy, Public Expenditure Composition, and Growth: Theory and Empirics. AESTIMATIO, the IEB International Journal of Finance (2). pp. 48-89. ISSN 2173-0164

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Abstract

This paper responds to the development policy debate involving the World Bank and the IMF on the use of fiscal policy not only for economic stabilization but also to promote economic growth and increase per capita income. A key issue in this debate relates to the effect of the composition of public expenditure on economic growth. Policy makers and some researchers have argued that expenditure on growth-enhancing functions could enhance future revenue and justify the provision of "fiscal space" in the budget. But there are no simple ways to identify the growth-maximizing composition of public expenditure. The current paper lays out a research strategy to explore the effects of fiscal policy, including the composition of public expenditure, on economic growth, using a time series approach. Based on the modeling strategy of Greiner, Semmler and Gong (2005) we develop a general model that features a government that undertakes public expenditure on (a) education and health facilities which enhance human capital, (b) public infrastructure such as roads and bridges necessary for market activity, (c) public administration to support government functions, (d) transfers and public consumption facilities, and (e) debt service. The proposed model is numerically solved, calibrated and the impact of the composition of public expenditure on the long-run per capita income explored for low-, lower-middle- and uppermiddle-income countries. Policy implications and practical policy rules are spelled out, the extension to an estimable model indicated, a debt sustainability test proposed, and the out-of-steady-state dynamics studied.

Item Type: Article
Additional Information: AESTIMATIO, the IEB International Journal of Finance: This is an open access journal which means that all content is freely available without charge to the user or his/her institution. Users are allowed to read, download, copy, distribute, print, search, or link to the full texts of the articles in this journal without asking prior permission from the publisher or the author. This is in accordance with the BOAI definition of open access.
Keywords: infrastructure investment / economic growth / compostion of the public budget / financing public expenditures / public deficit / public debt
Classification Codes: JEL H1, H2, H3, H4, H5, E2, E6
Divisions: Departments > Sozioökonomie > Multi-Level Governance and Development
Version of the Document: Published
Variance from Published Version: None
Depositing User: Elena Simukovic
Date Deposited: 22 Dec 2016 11:28
Last Modified: 22 Dec 2016 14:25
Related URLs:
FIDES Link: https://bach.wu.ac.at/d/research/results/55329/
URI: http://epub.wu.ac.at/id/eprint/5357

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