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

3. Data and Methodology

4. Estimation Results

5.Conclusions

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)

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

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 (-)

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

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

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

2.Theoretical BackgroundIhori & Kondo, 2001

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3.Data and MethodologySymbol DescriptionLCCONSUM Real government spending (log) on public

consumption, CPI deflated, base month, 1991:01LCHUMAN Real government spending on human capital, CPI

deflated, base month, 1991:01LCINVEST Real government spending (log) on public

investment, CPI deflated, base month, 1991:01LCQIND Real industrial production (log), PPI deflated , base

month, 1991:01DCONSUM Growth rate of public consumptionDHUMAN Growth rate of human capital government spendingDINVEST Growth rate of government spending on

infrastructureDQIND Growth rate of industrial production

Source: N.B.R. Annual and MonthlyReports.

4.Estimation Results1st Step: simple OLS

2nd Step: “exogeneity” (Edelberg, Eichenbaum & Fisher, 1998)

3rd Step: VECM

Dependent Variable: DQINDMethod: Least SquaresDate: 06/25/99 Time: 21:00Sample(adjusted): 1992:03 2001:09Included observations: 115 after adjusting endpointsNewey-West HAC Standard Errors & Covariance (lag truncation=4)

Variable Coefficient Std. Error t-Statistic Prob.DINVEST -0.024100 0.045361 -0.531300 0.5963

DCONSUM 0.015880 0.029507 0.538154 0.5916DHUMAN 0.015647 0.026742 0.585114 0.5597

SEAS -0.083104 0.019235 -4.320466 0.0000C -0.004276 0.005833 -0.733166 0.4650

R-squared 0.068530 Mean dependent var -0.003698Adjusted R-squared 0.034658 S.D. dependent var 0.085096S.E. of regression 0.083609 Akaike info criterion -2.082837Sum squared resid 0.768943 Schwarz criterion -1.963492Log likelihood 124.7631 F-statistic 2.023216Durbin-Watson stat 2.327024 Prob(F-statistic) 0.096103

)( ttit fG ....0),( tifz itt

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

DQIND - 4 lags

ADF Test Statistic -6.166562 1% Critical Value* -2.5844 5% Critical Value -1.9429 10% Critical Value -1.6172

DINVEST - 4 lags, intercept

ADF Test Statistic -7.227855 1% Critical Value* -3.49065% Critical Value -2.887710% Critical Value -2.5805

DHUMAN - 4 lags, intercept


DCONSUM - 4 lag, intercept


DINCOME - 4 lag, intercept


Dependent Variable: DHUMANMethod: Least SquaresDate: 06/26/99 Time: 08:58Sample(adjusted): 1992:11 2001:09Included observations: 107 after adjusting endpointsConvergence achieved after 8 iterationsNewey-West HAC Standard Errors & Covariance (lag truncation=4)Variable Coefficient Std. Error t-Statistic Prob.

DHUMAN(-1) -0.579361 0.098008 -5.911371 0.0000DHUMAN(-2) -0.467670 0.076827 -6.087311 0.0000

DCONSUM(-1) -0.147590 0.072311 -2.041053 0.0439DINVEST 0.338493 0.083908 4.034110 0.0001

SEAS 0.465306 0.080681 5.767222 0.0000AR(2) -0.440269 0.193891 -2.270707 0.0254AR(3) -0.625042 0.113441 -5.509853 0.0000AR(4) -0.293302 0.065879 -4.452111 0.0000AR(6) -0.262480 0.122428 -2.143949 0.0345

R-squared 0.685767 Mean dependent var -0.013247Adjusted R-squared 0.660116 S.D. dependent var 0.490725S.E. of regression 0.286091 Akaike info criterion 0.415346Sum squared resid 8.021088 Schwarz criterion 0.640164Log likelihood -13.22104 F-statistic 26.73386Durbin-Watson stat 1.935245 Prob(F-statistic) 0.000000Inverted AR Roots .44+.68i .44 -.68i .26+.75i .26 -.75i

-.69 -.40i -.69+.40i

Breusch-Godfrey Serial Correlation LM Test: (7 lags)F-statistic 1.562423 Probability 0.156712Obs*R-squared 9.947410 Probability 0.191573

-1.5

-1.0

-0.5

0.0

0.5

1.0

93 94 95 96 97 98 99 00 01

RESHUMAN

RESHUMAN - 4 lags


Estimating DQIND - RESHUMAN


Variable Coefficient Std. Error t-Statistic Prob.RESHUMAN(-6) -0.082837 0.029995 -2.761667 0.0070RESHUMAN(-7) -0.066954 0.025416 -2.634315 0.0099RESHUMAN(-8) 0.086324 0.038080 2.266882 0.0258

RESHUMAN(-12) -0.073734 0.029189 -2.526125 0.0133R-squared 0.136740 Mean dependent var -0.001936Adjusted R-squared 0.108281 S.D. dependent var 0.088705S.E. of regression 0.083765 Akaike info criterion -2.080421Sum squared resid 0.638501 Schwarz criterion -1.972889Log likelihood 102.8200 F-statistic 4.804789Durbin-Watson stat 2.187625 Prob(F-statistic) 0.003753

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

Dependent Variable: DINVESTMethod: Least SquaresDate: 06/26/99 Time: 09:07Sample(adjusted): 1992:12 2001:09Included observations: 106 after adjusting endpointsConvergence achieved after 8 iterationsNewey-West HAC Standard Errors & Covariance (lag truncation=4)

Variable Coefficient Std. Error t-Statistic Prob.DINVEST(-1) -0.595561 0.086203 -6.908806 0.0000DINVEST(-2) -0.191481 0.089017 -2.151067 0.0339

DINCOME(-2) -0.256131 0.071203 -3.597191 0.0005DCONSUM(-1) -0.126994 0.046515 -2.730171 0.0075DCONSUM(-2) -0.149078 0.057686 -2.584314 0.0112

SEAS 0.346213 0.102169 3.388629 0.0010AR(7) -0.294462 0.089070 -3.305955 0.0013

R-squared 0.497714 Mean dependent var -0.013081Adjusted R-squared 0.467273 S.D. dependent var 0.350216S.E. of regression 0.255616 Akaike info criterion 0.173475Sum squared resid 6.468612 Schwarz criterion 0.349362Log likelihood -2.194172 F-statistic 16.34983Durbin-Watson stat 1.847743 Prob(F-statistic) 0.000000Inverted AR Roots .76+.36i .76 -.36i .19+.82i .19 -.82i

-.52 -.66i -.52+.66i -.84

Breusch-Godfrey Serial Correlation LM Test (12 lags)F-statistic 1.301366 Probability 0.232462Obs*R-squared 15.21274 Probability 0.230008

RESINVEST - 4 lags


-1.2

-0.8

-0.4

0.0

0.4

0.8

93 94 95 96 97 98 99 00 01

RESINVEST

Estimating DQIND - RESINVEST


Variable Coefficient Std. Error t-Statistic Prob.RESINVEST(-4) 0.072316 0.029700 2.434840 0.0168

RESINVEST(-10) -0.075973 0.038255 -1.985984 0.0499R-squared 0.087171 Mean dependent var -0.001388Adjusted R-squared 0.077460 S.D. dependent var 0.088399S.E. of regression 0.084907 Akaike info criterion -2.073917Sum squared resid 0.677658 Schwarz criterion -2.020493Log likelihood 101.5480 F-statistic 8.976582Durbin-Watson stat 2.343924 Prob(F-statistic) 0.003497

LCQIND - 4 lags, intercept


LCINVEST - 4 lags, intercept


LCHUMAN - 4 lags, intercept


LCCONSUM - 4 lags, intercept


DQIND - 4 lags


DINVEST - 4 lags, intercept

ADF Test Statistic -7.227855 1% Critical Value* -3.49065% Critical Value -2.887710% Critical Value -2.5805

DHUMAN - 4 lags, intercept


DCONSUM - 4 lag, intercept


Johansen Cointegration Test

Likelihood 5 Percent 1 Percent HypothesizedEigenvalue Ratio Critical Value Critical Value No. of CE(s) 0.228582 49.35512 47.21 54.46 None * 0.106868 20.02876 29.68 35.65 At most 1 0.051697 7.257420 15.41 20.04 At most 2 0.011082 1.259227 3.76 6.65 At most 3

-0.025

-0.020

-0.015

-0.010

-0.005

0.000

5 10 15 20 25 30 35 40 45 50

Response of LCQIND to One S.D. LCCONSUM Innovation

-0.012

-0.010

-0.008

-0.006

-0.004

-0.002

0.000

5 10 15 20 25 30 35 40 45 50

Response of LCQIND to One S.D. LCINVEST Innovation

0.00

0.01

0.02

0.03

0.04

0.05

5 10 15 20 25 30 35 40 45 50

Response of LCQIND to One S.D. LCHUMAN Innovation

5.Conclusionsindustrial 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

Shortcomings:

cross-section analysis (not my favourite)

monthly data

”exogeneity” of government spending on consumption

first-difference stationarity: coefficients from OLS

financing government spending

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

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

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