Publication: Fiscal Policy, Public Expenditure Composition, and Growth : Theory and Empirics
Date
2007-11
ISSN
Published
2007-11
Author(s)
Semmler, Willi
Greiner, Alfred
Diallo, Bobo
Rezai, Armon
Rajaram, Anand
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.
Citation
“Semmler, Willi; Greiner, Alfred; Diallo, Bobo; Rezai, Armon; Rajaram, Anand. 2007. Fiscal Policy, Public Expenditure Composition, and Growth : Theory and Empirics. Policy Research Working Paper; No. 4405. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/e7e1baf7-fd8c-5058-854e-42026ba2ab49 License: CC BY 3.0 IGO.”
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