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

36 Pages Posted: 20 Apr 2016

See all articles by Willi Semmler

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Bobo Diallo

New School University

Armon Rezai

New School University

Anand Rajaram

World Bank; London School of Economics & Political Science (LSE) - The International Growth Centre

Date Written: November 1, 2007

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 upper-middle-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.

Keywords: Economic Theory & Research, Debt Markets, Public Sector Expenditure Analysis & Management, Access to Finance

Suggested Citation

Semmler, Willi and Greiner, Alfred and Diallo, Bobo and Rezai, Armon and Rajaram, Anand, Fiscal Policy, Public Expenditure Composition, and Growth Theory and Empirics (November 1, 2007). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2007. Available at SSRN: https://ssrn.com/abstract=1031561

Willi Semmler

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universitätsstraße 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
Bielefeld, 33501
Germany
+49 521 106 4859 (Phone)
+49 521 106 67120 (Fax)

HOME PAGE: http://phoenix.wiwi.uni-bielefeld.de/lehrbereiche/vwl/wipol

Bobo Diallo

New School University

80 Fifth Ave.
5th Floor
New York, NY 10027
United States

Armon Rezai

New School University

80 Fifth Ave.
5th Floor
New York, NY 10027
United States

Anand Rajaram (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

London School of Economics & Political Science (LSE) - The International Growth Centre ( email )

32 Lincoln’s Inn Fields
Houghton Street
London, WC2A 2AE
United Kingdom

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