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ACADEMY OF ECONOMIC STUDIES BUCHAREST DOCTORAL SCHOOL OF FINANCE - BANKING DISSERTATION PAPER

ACADEMY OF ECONOMIC STUDIES BUCHAREST DOCTORAL SCHOOL OF FINANCE - BANKING DISSERTATION PAPER The Effects of Government Spending on Economic Growth Supervisor: Professor MOISA ALTAR MCs Student: STOIAN ANDREEA - MARIA June 2002. 1. Empirical Evidence 2.Theoretical Background

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ACADEMY OF ECONOMIC STUDIES BUCHAREST DOCTORAL SCHOOL OF FINANCE - BANKING DISSERTATION PAPER

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  1. ACADEMY OF ECONOMIC STUDIES BUCHAREST DOCTORAL SCHOOL OF FINANCE - BANKING DISSERTATION PAPER The Effects of Government Spending on Economic Growth Supervisor: Professor MOISA ALTAR MCs Student: STOIAN ANDREEA - MARIA June 2002

  2. 1. Empirical Evidence 2.Theoretical Background 3. Data and Methodology 4. Estimation Results 5.Conclusions

  3. 1. Empirical Evidence exogenous growth endogenous growth government spending as flow (Ram, Barro, Engen & Skinner, Heitger) public capital hypothesis (Aschauer, Batina, Pereira) financing government spending (Devereux & Love)

  4. Ram (1986) cross-section 115 countries, 1960-1980 (Summers-Heston database) 1960-1970, 1970-1980 LDC individual regression (20 observations) Findings: positive relationship government played an important role during major shocks 70/115, positive relationship 1 case, negative relationship

  5. Barro (1989) endogenous growth government spending flow cross -section, 72 countries,1960-1985 (Summers-Heston database) excepting major oil-exporting countries Findings: positive relationship: social transfers, government spending on infrastructure negative relationship: public consumption spending not significant relationship: national defense, education inverse causality (Wagner’s Law): social transfers (+), education (+), public consumption government spending (-)

  6. Engen and Skinner (1992) taxation and government spending 107 countries, 1970-1985 (Summers-Heston database) negative relationship government spending - economic growth Heitger (2001) neoclassical model 21 OECD countries, 1960-2000 public consumption, transfers (interest payments, subsidies), public investment negative relationship: economic growth, investment not-significant human capital

  7. Aschauer (2001) public capital hypothesis ”core” public goods vs. “others” 48 american states, 1970-1990 positive relationship more significance for “others” Pereira (2001) public capital hypothesis 12 OECD countries VAR/VECM cointegration: Belgium, Canada, Germany, Sweden no-cointegration: 8 24-34 observations

  8. Aschauer (2001) initial investments: bond issue maintenance of capital: taxes negative relationship Devereux & Love (1995) government spending financed by taxes temporary or permanent shock: decreasing growth rate

  9. 2.Theoretical Background Ihori & Kondo, 2001

  10. 3.Data and Methodology

  11. 4.Estimation Results 1st Step: simple OLS 2nd Step: “exogeneity” (Edelberg, Eichenbaum & Fisher, 1998) 3rd Step: VECM

  12. DHUMAN=f(DHUMAN(-1),DHUMAN(-2),DCONSUM,DCONSUM(-1),DINVEST,DINCOME,SEAS)+εtDHUMAN=f(DHUMAN(-1),DHUMAN(-2),DCONSUM,DCONSUM(-1),DINVEST,DINCOME,SEAS)+εt

  13. DINVEST=f(DINVEST(-1),DINVEST(-2),DCONSUM,DCONSUM(-1),DCONSUM(-2),SEAS)+εtDINVEST=f(DINVEST(-1),DINVEST(-2),DCONSUM,DCONSUM(-1),DCONSUM(-2),SEAS)+εt

  14. 5.Conclusions industrial production reacts on shocks on human capital government spending industrial output reacts on shocks on government spending on investments the effects of HCGS are more significant than those of GSI long-run equilibrium relationship GSC, GSI negative effects on industrial production HCGS positive effects on industrial production industrial production human capital intensive

  15. Shortcomings: cross-section analysis (not my favourite) monthly data ”exogeneity” of government spending on consumption first-difference stationarity: coefficients from OLS financing government spending

  16. References • Aschauer, D.A. (2001), "Output and Employment Effects of Public Capital",Public Finance & Management,1,2, pp.135-160 • Barro, R.J. (1988a), "Government Spending in a Simple Model of Endogenous Growth",NBER Working Paper Series • (1989b), "A Coss - Countru Study of Growth, Saving and Government",NBER Working Paper Series • Barro, R.J. and X. Sala-I-Martin (1995), "Economic Growth",The MIT Press, pp.152-161,330-462 • Batina, R.G. (2001), "The Effects of Public Capital on the Economy", Public Finance & Management,1,2, pp.113-134 • Brock W.A. and S.N.Durlauf, "Growth Economics and Reality", NBER Working Paper Series • Carr, J.L. (1989), "Government Size and Economic Growth: A New Framework and Some Evidence from Cross-Section and Time Series Data: Comment", American Economic Review, 79, pp.267-271 • Cullis, J. and P.Jones (1998), "Public Finance and Public Choice", Oxford University Press, Oxford, 352-371 • Devereux, M.B. and D.R.F.Love (1995), "The Dymanic Effects of Government Spending Policies in a Two - Sector Endogenous Growth Model", Journal of Money, Credit, and Banking, 27, pp.232-256 • Edelberg W., M.Eichenbaum and J.D.M.Fisher (1998), "Understanding the Effects of a Shock to Government Purchases", NBER Working Series • Enders W., "Applied Econometric Time Series", John Wiley & Sons, INC • Engen E.M. and J.Skinner (1992), "Fiscal Policy and Economic Growth", NBER Working Paper Series • Fölster S. and M.Henrekson, (1998a),"Growth and Public Sector: A Critique of the Critics", WOPEC Working Paper Series • (2000b), "Growth Effects of Government Expenditure and Taxation in Rich Countries", WOPEC Working Paper Series • Greene W.H. (2000), "Econometric Analysis", Prentice Hall International, Inc • Hamilton J.D. (1994), "Time Series Analysis", Princeton University Press, Princeton, New Jersey • Heitger B. (2001), "The Scope of Government and Its Impact on Economic Growth in OECD Countries", WOPEC Working Paper Series • Ihori T. and H.Kondo (2001), "The Efficiency of Disaggregate Public Capital Provision in Japan", Public Finance & Management, 1,2, pp.161-182 • Palivos T. and C.K.Zip, "Government Expenditure Financing in an Endogenous Growth Model: A Comparison", Journal of Money, Credit, and Banking, 27, pp.1159-1178 • Pereira A.M. (2001), "Public Investment and Private Sector Performance - International Evidence", Public Finance & Management, 1,2, pp.261-277 • Ram R. (1986), "Government Size and Economic Growth: A New Framework and Some Evidence from Cross-Section and Time Series Data", American Economic Review, 76, pp.291-203 • Rubio -Oscar B. (2000), "A Further Generalization of the Solow Growth Model: The Role of the Public Sector", Economics Letters, 68, pp.79-84 • National Bank of Romania, "Monthly Report", 1999-2001 • National Bank of Romania, "Annual Report", 1991-2001

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