The Optimal Public Expenditure Financing Policy: Does the Level of Economic Development Matter?

20 Pages Posted: 26 Jun 2007

See all articles by Niloy Bose

Niloy Bose

University of Wisconsin at Milwaukee - Department of Economics; Virginia Polytechnic Institute & State University - Department of Economics

Jill Ann Holman

University of Wisconsin - Milwaukee - Department of Economics

Kyriakos C. Neanidis

University of Manchester - School of Social Sciences

Abstract

This paper explores how the optimal mode of public finance depends on the level of economic development. The theoretical analysis suggests that in the presence of capital market imperfection and liquidity shocks, the detrimental effect of inflation on growth is stronger (weaker) at lower (higher) levels of economic development. Consequently, income taxation (seigniorage) is a relatively less distortionary way of financing public expenditure for low-income (high-income) countries. We provide empirical support for our models predictions using a panel of 21 Organization for Economic Cooperation and Development countries and 40 developing countries observed over the period 1972-1999.

Suggested Citation

Bose, Niloy and Holman, Jill Ann and Neanidis, Kyriakos C., The Optimal Public Expenditure Financing Policy: Does the Level of Economic Development Matter?. Economic Inquiry, Vol. 45, No. 3, pp. 433-452, July 2007. Available at SSRN: https://ssrn.com/abstract=994415 or http://dx.doi.org/10.1111/j.1465-7295.2007.00021.x

Niloy Bose

University of Wisconsin at Milwaukee - Department of Economics ( email )

Bolton Hall
Milwaukee, WI 53211
United States
414-229-6132 (Phone)

HOME PAGE: http://www.uwm.edu/Dept/Economics/faculty/bose.html

Virginia Polytechnic Institute & State University - Department of Economics ( email )

3021 Pamplin Hall
Blacksburg, VA 24061
United States

Jill Ann Holman

University of Wisconsin - Milwaukee - Department of Economics ( email )

Bolton Hall 802
3210 N. Maryland Ave.
Milwaukee, WI 53211
United States
(414) 229-6132 (Phone)
(414) 229-3860 (Fax)

Kyriakos C. Neanidis

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom
+44-161-275-4832 (Phone)
+44-161-275-4812 (Fax)

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