The effectiveness of capital expenditure in an endogenous growth model: evidence from US states

The lessons from the last economic recession tell us that governments spend a lot of money on capital expenditure, such as the construction of buildings, roads and bridges in order to restore the economy. However, even if governments try to invest their money in capital expenditure, it is questionable whether expenditures on capital structures are really effective in achieving an economic recovery. Thus, our study attempts to investigate whether capital expenditure has a positive impact on economic growth. To achieve this goal, this article includes the endogenous growth model. More specifically, the endogenous growth model can be divided into two models: a basic model and an extensive model, which also set political and institutional factors as control variables. By using a panelled data analysis of US states from 1990 to 2013, the empirical results of the endogenous growth model suggest that the proportion of capital expenditure as a percentage of GSP is negatively related to economic growth, while state government savings as a percentage of GSP has a positive relationship with it. Therefore, capital expenditure in the US states is not an effective tool for fiscal policy and their effectiveness should be further discussed.