Semmler, WilliGreiner, AlfredDiallo, BoboRezai, ArmonRajaram, Anand2012-06-112012-06-112007-11https://hdl.handle.net/10986/7641This 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.CC BY 3.0 IGOANNUAL REVENUEBANK POLICYBONDSBUDGET CONSTRAINTBUDGET CONSTRAINTSBUDGET DEFICITBUDGET DEFICITSBUSINESS CYCLECAPITAL ACCUMULATIONCAPITAL ALLOCATIONCAPITAL EXPENDITURECAPITAL FORMATIONCAPITAL MARKETSCAPITAL STOCKCAPITAL STOCKSCATEGORIES OF EXPENDITURECDCONSUMPTION EXPENDITURECORRECTIVE ACTIONCORRUPTIONCURRENT ACCOUNTCURRENT ACCOUNT DEFICITSDEBTDEBT ISSUEDEBT LEVELDEBT PAYMENTSDEBT POLICYDEBT RATIODEBT REPAYMENTDEBT SERVICEDEBT SERVICESDEBT SUSTAINABILITYDEBT TO INCOME RATIODEBT-TO-INCOME RATIODECISION MAKINGDEPRECIATIONDEVELOPING COUNTRIESDEVELOPMENT ECONOMICSDEVELOPMENT POLICIESDEVELOPMENT POLICYDEVELOPMENT STRATEGIESDISCOUNT RATEECONOMETRIC TECHNIQUESECONOMIC AGENTSECONOMIC DEVELOPMENTECONOMIC GROWTHECONOMIC IMPLICATIONSECONOMIC MANAGEMENTECONOMIC POLICIESECONOMIC POLICYECONOMIC STABILIZATIONECONOMIC SURVEYSECONOMIC SYSTEMEDUCATION EXPENDITURESEDUCATION SERVICESEDUCATIONAL SERVICESELASTICITYELASTICITY PARAMETERSENDOGENOUS VARIABLESENVIRONMENTAL PROTECTIONEQUATIONSEXPECTED VALUEEXPENDITUREEXPENDITURE CATEGORIESEXPENDITURE PARAMETERSEXTERNALITIESFACILITATIONFEDERAL BUDGETFINANCIAL SUPPORTFISCAL ADJUSTMENTSFISCAL DISCIPLINEFISCAL EXPENDITUREFISCAL POLICIESFISCAL POLICYFISCAL POLICY RULESFISCAL RULESFOREIGN BORROWINGFOREIGN DEBTGDPGENERAL PUBLICGOVERNMENT BONDSGOVERNMENT BORROWINGGOVERNMENT BUDGETGOVERNMENT BUDGET CONSTRAINTGOVERNMENT DEBTGOVERNMENT DEFICITSGOVERNMENT EMPLOYMENTGOVERNMENT EXPENDITUREGOVERNMENT EXPENDITURESGOVERNMENT FINANCEGOVERNMENT FINANCE STATISTICSGOVERNMENT REVENUEGOVERNMENT SPENDINGGROWTH MODELGROWTH MODELSGROWTH RATEGROWTH THEORIESGROWTH THEORYHEALTH SERVICESHEALTH SPENDINGHOUSEHOLDSHUMAN CAPITALINCOME GROUPINCOME GROUPSINCOME LEVELINCREASING RETURNSINDEBTEDNESSINEFFICIENCYINFRASTRUCTURE EXPENDITUREINFRASTRUCTURE INVESTMENTINSURANCEINTEREST PAYMENTSINTEREST RATEINTEREST RATESINTERNATIONAL BANKINVESTMENT EXPENDITUREINVESTMENT FUNDSLABOR FORCELOANLONG RUN DEBTLOW-INCOMELOW-INCOME GROUPLOW-INCOME GROUPSLUMP-SUM TAXATIONMACROECONOMIC STABILITYMACROECONOMIC VARIABLESMACROECONOMICSMARGINAL PRODUCTMIDDLE INCOME COUNTRIESMILITARY SPENDINGMONETARY FUNDMORAL HAZARDNEGATIVE VALUESNET BORROWINGNET CAPITALNET DEBTNUMERICAL VALUENUTRITIONOPTIMIZATIONOUTPUT RATIOPER CAPITA INCOMEPHYSICAL CAPITALPOLICY DECISIONSPOLICY DESIGNPOLITICAL ECONOMYPOVERTY REDUCTIONPRESENT VALUEPRIVATE CAPITALPRIVATE CONSUMPTIONPRIVATE MARKETPRIVATE SECTORPRODUCTION FUNCTIONPRODUCTIVITYPROGRAMSPUBLIC ADMINISTRATIONPUBLIC CAPITALPUBLIC CONSUMPTIONPUBLIC DEBTPUBLIC DEFICITSPUBLIC EDUCATIONPUBLIC EXPENDITUREPUBLIC GOODSPUBLIC INFRASTRUCTUREPUBLIC INVESTMENTPUBLIC INVESTMENTSPUBLIC POLICYPUBLIC RESOURCESPUBLIC SECTORPUBLIC SERVICESPUBLIC SPENDINGRATE OF GROWTHRECESSIONSREPAYMENTSRESERVERESERVESRETURNSANITATIONSOCIAL INSURANCESOCIAL INSURANCE SYSTEMSOCIAL INSURANCE SYSTEMSSOCIAL SECURITYSTATIC ANALYSESSTATIC ANALYSISSTOCKSSUSTAINABLE DEBT LEVELSUSTAINABLE FISCAL POLICYTAXTAX COLLECTIONTAX RATETAX REVENUETAXATIONTOTAL FACTOR PRODUCTIVITYTOTAL PUBLIC EXPENDITURETRUST FUNDUNCERTAINTYUNDERVALUATIONUTILITY FUNCTIONVALUABLEWAGEWAGE EXPENDITUREWATER SUPPLY INFRASTRUCTUREWELFARE FUNCTIONWITHDRAWALWORLD INTEREST RATEWORTHWorld Bank10.1596/1813-9450-4405